NOV Inc.

Good day, ladies and gentlemen, and welcome to the NOV fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blake McCarthy. Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to NOV's fourth quarter 2021 earnings conference call. With me today are Clay Williams, our Chairman, President, and CEO, and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal 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 fourth quarter of 2021, NOV reported revenues of $1.52 billion and a net loss of $40 million. For the full year 2021, revenues were $5.52 billion and a net loss of $250 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA, as defined in our earnings release. Later in the call, we will host a question and answer session. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Thank you, Blake. For the fourth quarter of 2021, NOV's revenue grew 13% sequentially and 14% year-over-year. These results marked the first quarter in which our revenue has increased year over year since our revenues bottomed in early 2021 and our backlog bottomed in late 2020. The company continued to build its backlog, which increased for the fourth quarter in a row. Book-to-bill was 137%. For the full year 2021, NOV generated $229 million in EBITDA, or 4.1%, on $5.5 billion in revenue. Revenues declined 9% from the prior year at 21% decremental EBITDA leverage year over year. While we are pleased with the slow but steady recovery of demand and activity in the oil field and our continued revenue and backlog growth, we are disappointed in our low sequential operating leverage and margins in the fourth quarter. Consolidated EBITDA leverage was only 7% sequentially, nearly 20% lower than we expected at the time of our call. All three segments struggled this quarter with supply chain challenges that we did not foresee, along with mixed issues and COVID disruptions related to the emergence of the Omicron variant during the fourth quarter. And while we expect these to subside longer term, we now expect supply chain headwinds to continue to persist through the first half of 2022 as our vendors continue to push out their delivery commitments to us. In addition to COVID-related charges of $11 million on projects that the completion and production solutions segment is executing in Asia, Our productivity and efficiency was broadly encumbered by two significant factors. First, the tightening labor market we face in the United States was exacerbated by COVID outbreaks in certain plants during the fourth quarter. As skilled workers recuperated safely at home, their work was performed by less experienced, less efficient crews, or by other skilled workers working overtime. Labor shortages led to higher product costs and scheduling headaches. We had the same issues at plants in the Middle East and elsewhere overseas, and we saw pockets of Omicron COVID affecting our field personnel in a few areas around the globe. These COVID disruptions intensified greatly with the emergence of the Omicron variant in the fourth quarter and are continuing into the first quarter of 2022. Second, our manufacturing scheduling headaches were compounded by component and raw material shortages and late deliveries from our vendors who are facing the same sorts of challenges that we are. Late deliveries and short shipments of raw materials and sub-assemblies led to further inefficiencies under absorption and higher product costs in certain areas as our creative workforce scrambled to make do with the raw materials and components that they had on hand. Indicative of supply chain inflation, all three segments saw negative purchase price variances. And where we were unable to access raw materials, where possible, we substituted different, more expensive components into our bills of materials. These substitutions frequently required additional labor to conform the parts to our standards, which further increased the cost. All three segments experienced this to a greater or lesser degree. Some businesses report supply chain challenges are getting a little better, but most see these disruptions persisting or getting more challenging in the near term. Specifically, freight, steel, certain epoxies appear to be stabilizing. Resin prices are falling in Asia but rising in the United States, for example. But electronic components, motors, touchscreens, certain polymers, et cetera, appear to be getting tighter. The reliability of raw material deliveries is frankly poor as ports and trucks shut down unexpectedly due to COVID outbreaks. Some of our industrial customers in the cap segment are delaying purchases of fuel handling piping and industrial pumps because they can't get construction crews to do the installs or they're still missing other complimentary items like electronic controllers from other vendors. Importantly, NOV continues to take extraordinary measures to get our products and equipment into the hands of our customers to support their critical operations. So despite these challenges, we were able to put up double-digit sequential sales growth across all three segments. I'm proud of the job our manufacturing team has done getting products out the door. However, we need to do a better job on pricing in anticipation of more inflation that we know is coming. As we enter 2022, we are operating in the most constrained and inflationary environment the world has seen in at least a generation, where labor and materials are tight and the money supply has ballooned across major economies due to COVID relief efforts. Even though we have been trying to push our pricing higher to defend our margins, we have been less successful so far than we need to be. On prior quarters, we've spoken of select price increases that we were able to achieve, including many double-digit moves. Nevertheless, our fourth quarter results point to the need to redouble our efforts to get to acceptable margins. We believe the margins embedded in our backlog are solid, and the future costs within our contracts are generally protected against inflation through either indexing or contracts with our vendors. However, inflation protection is never perfect. Headwinds like quadrupling of freight, higher labor costs, workforce disruptions, and vendor delays can still impact our margins on these, as they did in the fourth quarter. We're fortunate... in that we were able to secure sufficient backlog to carry our plants to the depths of the downturn. However, looking ahead is incumbent on our team to win incremental orders that improve margin and pricing to get back to an acceptable return on capital. In the near term, pricing remains challenging for many of our products, owing to our position in the oil field food chain. High commodity prices are leading to abundant prosperity for the EMPs. For products that we sell directly to the EMPs, our transactions have more room to achieve a fairer split of the economic pie, meaning we are better able to move prices up. However, prosperity rolls downhill in the oil field, and it hasn't fully showed up yet with oil field service companies, who make up the majority of our customer base. As a group, most are still working through depressed pricing for their services. For example, leading edge super spec land drilling rig rates for North America have only this quarter returned to the mid $20,000 per day level seen before the pandemic lockdown. But contractors have most of their fleets contracted for the next few quarters at much lower rates. Leading edge coil tubing and pressure pumping rates have bounced off 2020 lows but remain below 2019 levels. Offshore drillers are seeing day rates rising for drill ships with leading edge discussions above $300,000 per day and some closer to $400,000 per day but most rigs remain contracted at very depressed day rates far below levels seen a decade ago. Our customers report that things are definitely going the right way, but more healing is needed before oilfield service contractors can open up their pocketbooks and spend more freely with NOV. And in the meantime, our competition in many instances remains desperate for work to cover their fixed costs. The good news for NOV is that the stage is set for prosperity to trickle down soon to our level. The world is facing a tightening supply and demand gap for energy after years of underinvestment, and current global activity levels are insufficient to bridge that gap. Commodity markets are waking up to the fact that the world consumed a billion-barrel inventory overhang that we generated during the lockdown of 2020 in less than 15 months. NOV is very well positioned to benefit from investments which are required and are expected to flow in our traditional oil and gas markets over the next few years. In addition to operating in one of the most constructive commodity price environments I've seen in my career, which should lead to a multi-year upcycle, NOV has a lot of things going well. Wellbore Technologies, our earliest cycle segment and closest to the prosperity the oil companies are currently enjoying, posted its fourth quarter in a row of double-digit top-line growth, propelled by the continued recovery of U.S. drilling and emerging eastern hemisphere activity. Given its proximity to the EMPs in the oilfield ecosystem and its activity-driven product portfolio, Wellbore Technologies is best positioned to benefit from pricing early in an upcycle. Notwithstanding its own supply chain challenges, it has, in fact, achieved the greatest pricing gains, mostly in quick-turn, high-impact items like bits, downhole tools, and rig instrumentation specified by EMPs. Unfortunately, the fourth quarter saw some of these pricing gains offset by COVID and labor shortages in our labor-intensive tubular services businesses, higher resin and steel costs, and a lower margin mix of drill pipe than we expected. Jose will go into this more in just a moment. Owing to extensive supply lines and operations in Asia and acute raw material supply challenges across a couple of its business units, our completion and production solutions segment has been our most challenged with respect to achieving an acceptable margin. Most of its project charges stemmed from a COVID outbreak in our vendors' operation in a Southeast Asian shipyard, which led to inefficiencies, higher costs, and rework. We currently expect this project to be completed late this summer, barring further disruptions. Our fiberglass systems and subsea flexible pipe businesses also continue to fight for raw materials and are experiencing significant challenges with their respective supply chains. which will impact first quarter 2022 results. Despite these issues, customer demand is strong and rising, evidenced by the $495 million of orders booked by the segment during the quarter, translating to a book-to-bill of 159%. Our internal list of expected project tenders is large, and we are optimistic that 2022 will be a strong year for CAPS orders. While most CAPS orders are EMP offshore project-related, most represent years of cost iteration and negotiation undertaken during lean times to make the economics work for the EMP. We are pushing pricing and escalation where we can, but it remains challenging. So equally, we're focused on ensuring we have mitigated inflation and execution risks as much as possible. I think the outlook here is brightening as EPCs, manufacturers, and shipyards replenish their backlogs like we have been doing, and utilization rises, congestion builds, and constraints emerge. Urgency will also emerge among EMPs to rush to the front of the queue, which would provide a stronger pricing backdrop for us. Finally, our rig technology segment also posted a solid quarter of orders. RIG's order book has been helped enormously by its strong position in renewable energy, which once again helped lift its book to bill north of one this quarter. Renewable wind energy bookings exceeded $400 million in 2021. Despite rising day rates in many categories of drilling rigs, orders for the segment's traditional iron remains low as drilling contractors repair balance sheets and continue to cannibalize units idle during the pandemic lockdown. We are hearing reports now of drilling contractors buying old land rigs on the cheap at auction solely for parts, having cannibalized all their existing idle fleets. A couple of observations around the near term here. First, the nature of our business has pivoted from iron to smart iron. Interest is very high in emission reduction technologies that we've introduced, like our EcoBoost and our PowerBlade products, and our robotics automation upgrade offering, which will be in the field in the second quarter. and in our digital offerings around NOVOS operating systems, coupled with IntelliServe high-speed data transmission through the drill pipe. Second, things are getting better very quickly in the offshore, particularly for drill ships. The rising day rates I mentioned earlier are leading to reactivation discussions on more than a dozen stack floating rigs. Underpinned by high oil and gas prices, the increasing likelihood of offshore project FIDs by oil companies, steadily rising land rig activity around the world, and sustained high demand for offshore wind turbine installation vessels all point to continued growth in demand for rig technologies. Rig technologies' fourth quarter saw margins fall short of our expectations despite revenues landing where we expected, owing to a poor mix of aftermarket and capital equipment sales. Again, supply chain issues took a toll on operations and COVID affected some of our service hands. Despite these challenges, though, we were able to complete our first land drilling rig manufactured by our new JV facility in Saudi Arabia, and we have many more to come. This state-of-the-art technology will play a key role in the kingdom's ambitious development of unconventional gas. Given the challenges of the drilling contractor space over the past few years, which saw the majority of offshore drilling contractors go through bankruptcy reorganization, it has been difficult for the segment to raise prices. Nevertheless, as drilling contractors eventually find success lifting their day rates, which will be required to overcome the higher wage and operating costs they are now facing, we are confident that our pricing will improve commensurate with the high value our smart iron will provide. Despite the supply chain challenges facing NOV and all global manufacturers currently, I remain decidedly positive about the longer term. Strong commodity prices and EMP prosperity are beginning to flow to the greater oilfield services industry, which was decimated by severe downsizing to survive these past few years. Oil and gas is still the industry that fuels all other industries. The urgency to address lack of investment in this space will grow from here, and once again, NOV and its oilfield service customers will be called upon to construct the wellbores needed to ensure the globe's safe, reliable, affordable energy. NOB is emerging from the downturn with a strong balance sheet, an investment-grade rating, and ample financial resources, exciting new products that can retrofit our customers' oil-filled assets to reduce emissions, gather critical data, automate processes, drive better safety, and improve efficiency, and a terrific portfolio of energy transition technologies with hundreds of millions of dollars of energy transition-related revenue. All this has been made possible by our extraordinary teams, who have had the excruciating challenge of consolidating operations by reducing from more than 1,200 facilities to just over 550 facilities and reducing our costs by billions of dollars annually to navigate one of the worst downturns ever experienced in this 163-year-old industry. We are lean and mean and ready for the challenge ahead. To the employees of NOV who have been on this journey with us, Thank you for your creativity, your flexibility, your extraordinary efforts over the past two years to take great care of our customers through all kinds of unexpected challenges. You've positioned this organization for a great run, and I'm looking forward to sharing better days ahead with you. Thank you. With that, I'll turn it over to Jose.