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Edited Transcript of NOV earnings conference call or presentation 26-Apr-19 3:00pm GMT

Q1 2019 National Oilwell Varco Inc Earnings Call

HOUSTON May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of National Oilwell Varco Inc earnings conference call or presentation Friday, April 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clay C. Williams

National Oilwell Varco, Inc. - Chairman, President & CEO

* Jose A. Bayardo

National Oilwell Varco, Inc. - Senior VP & CFO

* Loren B. Singletary

National Oilwell Varco, Inc. - Chief Investor & Industry Relations Officer

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Conference Call Participants

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* Byron Keith Pope

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research

* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

* Kurt Kevin Hallead

RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* William Andrew Herbert

Simmons & Company International, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the National Oilwell Varco First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Loren Singletary, Chief Investor and Industry Relations Officer. Sir, you may begin.

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Loren B. Singletary, National Oilwell Varco, Inc. - Chief Investor & Industry Relations Officer [2]

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Thank you, and welcome, everyone, to National Oilwell Varco's first quarter 2019 earnings conference call. With me today are Clay Williams, our Chairman, President and Chief Executive Officer; and Jose Bayardo, 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 risk and uncertainty, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of our 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 2019, NOV reported revenues of $1.94 billion and a net loss of $77 million or $0.20 per 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 on in the call, we will host a question-and-answer session. (Operator Instructions)

Now let me turn the call over to Clay.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [3]

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Thank you, Loren. In the first quarter of 2019, NOV generated $1.94 billion in revenue, a decrease of 19% sequentially and an increase of 8% year-on-year. EBITDA was $140 million, down $139 million sequentially, representing 30% decremental leverage as EBITDA fell by half. Late last year, we witnessed one of the sharpest and fastest declines in oil price on record as WTI fell to $45 per barrel, along with rising demands from investors that oil companies exhibit more capital discipline and austerity. Oil companies responded by signaling their plans to trim CapEx and reduce activity as we entered 2019.

NOV's largest customers, the oilfield service companies that execute well construction plans for these oil companies, in trying to divine what the new year would hold, all seemed to decide that discretion is the better part of valor and they threw the brakes on their spending for the tools that they buy from NOV. Oilfield service companies are skilled at slashing spending during market slowdowns, and our phones went quiet in December and January. Our poor first quarter financial results reflect a sharp air pocket that arose from this latest round of capital austerity following that oil price dip. Broadly speaking, the factors that we cited on our last call, underpinning our revenue guide down to be in the low teens, ended up hitting with more ferocity than we expected, leading revenues down 19% sequentially instead.

While the outlook remains uncertain, WTI rebounding into the $60 range and Brent into the $70 range has helped improve our outlook, particularly in the offshore and international markets. Our Investor Day analysis showed just how physically asset-intensive oilfield operations are and the amount of equipment that gets consumed for every barrel developed. That physical linkage between equipment and oil means that while oilfield service companies can cut spending and cannibalize idled equipment and make do in the short run, eventually, they need to repair and replace their capital equipment stock and must start spending again. After a very quiet start to the year, we saw orders begin to flow in again in late February and March to support activity.

Book-to-bills in excess of 1 for Completion & Production Solutions, which booked half its orders in March. Rig Technologies and Drill Pipe provided much more constructive backdrop for the remainder of the year, and we expect our second quarter results to be significantly improved. Nevertheless, the impact of capital austerity on the speed and nature of a more robust oilfield recovery that we have been hoping for remains unknown and out of our control. Therefore, we are renewing our focus on controlling what we can, our costs. NOV underwent significant downsizing between 2015 and 2017, which took out $3 billion in annual cost and helped the organization generate over $2 billion in free cash flow over the same period. However, given the current market and outlook, the company's earnings are insufficient, and good stewardship dictates that we undertake additional cost reductions.

For context, our businesses are highly decentralized, purposely and strategically organized in a way that promotes a degree of autonomy for the teams that run them, who are closest to the coal face and best equipped to make the day-to-day operating decisions to maximize their performance. We have terrific entrepreneurial leaders who we trust to manage these businesses within a collaborative network.

Following our significant downsizing, our next opportunity to reduce costs will come from a reexamination of the degree of centralization of certain support functions within our organization, some of which we expect to move more towards a shared services model to drive further efficiency.

This is a heavy lift. It will take a few quarters to accomplish, but it is necessary to drive further profitability. While we are formulating our plans and refining savings estimates currently, we see a preliminary path to capture $120 million a year in savings and would not be surprised for our final plans to meaningfully exceed this.

Before Jose takes you through our first quarter results, I'd like to share with you some of the trends we see developing, starting in the North American pressure pumping market. In response to the uncertain outlook, our pressure pumping customers stopped ordering and scaled back maintenance at the end of 2018, leading to a 58% sequential decline in U.S. pressure pumping sales. Similarly, wireline and coiled tubing operators also cut spending, but the sequential decline was less severe for these and North American coiled tubing units that customers deferred delivery have begun to move out the door in April. Despite slow demand, we are finding interest in new products that we are introducing, plus we see some demand for replacement blenders, mixers and other frac support equipment. International markets, in contrast, are strengthening as demand for higher capacity coiled tubing, wireline and pressure pumping units rises, which helped our book-to-bill exceed 140% in the first quarter, albeit on lower sequential volume.

Secondly, slowing drilling activity in North America and overcapacity is driving price down on certain downhole tools, surface equipment and rig side services. Pricing is under pressure, down mid-single digits on our downhole agitator tools and shale shakers. On the other hand, we have been successful in getting price increases on shaker screens, bits and downhole drilling motors, the latter of which are up 21% year-on-year. We've also been able to get modest price increases in inspection services in certain regions.

Third, drill pipe demand is shifting from land to offshore. Despite land customer inventory levels within our drill pipe yard at 10-year lows, North American drillers pushed deliveries of drill pipe into the second quarter or later. This drove a sharp sequential falloff in revenue for our Grant Prideco business, which accounted for more than half of the total top line sequential decline for the Wellbore Technologies segment. This is not sustainable. Land drillers are demonstrating strict capital discipline, but they are consuming drill pipe daily and they won't be able to drill when they run out.

While we're seeing land drill pipe demand slow, international and offshore markets are moving the other way, coming back to the table after years of subsisting off excess drill pipe from their stacked fleets. This quarter, offshore sales increased 15% to push its mix to 39% of the total. And with 3/4 of our sales prospects now coming from offshore drillers who need to put drill pipe on rigs to reactivate them, that number is set to rise. The good news for NOV is our shore drillers employ larger, more sophisticated drill pipe, which drives higher margins.

Fourth, the recent capital austerity and decline in the active U.S. land rig count is driving a temporary halt in land rig upgrade programs. NOV has been at the nexus of the wave of rig upgrades and continues to lift the capabilities of the active U.S. land rig fleet to be in line with those commanding the highest day rate, the most modern super-spec rigs. Having picked the low-hanging fruit over the past few years, however, drillers are being cautious about spending up to half of the cost of a new rig to upgrade an older DC rig to high-spec AC, given sliding drilling activity and flat to slightly declining rig day rates. Nevertheless, NOV's offering into rig upgrades, including NOVOS operating systems, low-cost drawworks, top drive upgrades and other enhancements leave us well positioned for when rig upgrades resume.

Number five. Interestingly, the pace of rig special surveys and reactivations for offshore rigs is heading in the other direction. The active project pipeline we are working on has increased 30% over the past few quarters, and today, we are working on more than 30 offshore rig projects, 20 of which are reactivations of stacked rigs, helping these rig owners make their assets operationally ready to bid on the rising number of rig tenders offshore. This is good news for Grant Prideco, as I mentioned earlier. Having offshore drilling contractors increasingly demand our low cost of ownership Delta premium connection is a strong signal that our market adoption is growing sustainably.

Aftermarket revenues made up 54% of Rig Technologies segment's revenues, but exhibited typical first quarter seasonal declines despite more offshore projects. Contractors tend to deplete budgets and wrap up their repair jobs at the end of the year and then slow activity in the first quarter until budgets are fully reset. The first quarter of 2019 saw the highest quarter of spares bookings in almost 4 years and a rising offshore mix, signaling continued recovery of our offshore rig business as customers replenish dwindling inventories, which were cannibalized from stacked rigs during the downturn.

Number six. Water handling and disposal is an emerging bottleneck in the Permian basin, and produced saltwater and steel don't get along well. As the industry continues to build out the infrastructure to support the most prolific unconventional basin on the planet, operators in West Texas are calling on larger-diameter spooled composite pipe and high-pressure jointed fiberglass pipes, some of which -- some with diameters greater than 20 inches to handle produced water without corroding. As the largest supplier of composite pipe to the industry, this is an area that NOV is very well-positioned in to capitalize on.

Within our TK fiberglass line downhole tubulars business, we're seeing a shift from 2.375- and 2.875-inch downhole tubing to 4.5-inch tubing to handle higher volumes of fluids. NOV is also a leading provider of production chokes, reciprocating pumps, multiphase progressing cavity pumps and pipeline closures into this infrastructure buildout.

Seven. North American operators are keenly focused on completions, and new technology and value are upsetting the old order of things. As completion costs have risen to exceed 2/3 of an unconventional well AFE, the potential to reduce development costs by applying newer, more clever completion tools has increased proportionately. Nimble independents are open to trying new tools and technologies that can offer a meaningful impact on their development costs and risks. In this vein, operators are partnering with NOV to cut costs. For instance, this quarter, we ran our Setter composite frac plug for a major Permian operator, and we demonstrated the quickest drill and wash times and all plugs were tagged on depth. Our customer immediately awarded us a large portion of their frac plug business as a result.

We're also seeing customers around the globe test drive our liner hangers, sliding sleeves, burst port subs and other clever completion jewelry unique to NOV.

Number eight. Following a slow first quarter start, the Eastern Hemisphere may be shaping up for incremental growth as the year unfolds. For starters, the increase in coiled tubing demand in international markets is helping offset North American declines and is signaling the adoption of technologies upon which the North American share revolution was founded in new basins. Pressure pumping equipment, wireline units and completion tools are seeing increased adoption in Argentina and the Middle East.

We had a ribbon-cutting ceremony for our new fiberglass composite pipe facility in Dammam, Saudi Arabia in early April, and we also secured a substantial $50 million order there. We anticipate the composite pipe and corrosion-resistant technologies coming out of the state-of-the-art facility will proliferate into additional markets across the region. We're continuing to see certain international land rig tenders intending to replace aging fleets in places like Argentina, which now has several of our high-end AC drilling rigs posting records.

Other large rig tenders in India and the Middle East also continue to creep forward, while contractors employing higher-tech rigs in foreign markets are drilling circles around incumbents who built their rig fleets with the cheapest iron.

Number nine. Our Subsea Production business remained challenged in the first quarter. While things are looking up, it continues to be a slow grind. Flexible pipe revenue fell precipitously in the first quarter partially due to the pull-forward of deliveries at the end of the year. Encouragingly though, first quarter orders were higher than they've been in a year, and the customer and project mix is pointing to more greenfield projects.

We also expect second quarter orders for subsea projects to be strong, and we're encouraged by the improving outlet for LNG projects globally. NOV is a leading provider of gas treatment in high-grade inhibition technology, for example, offering monoethylene glycol reclamation units that can handle a ton of salt an hour and can cost over $100 million on a large project.

We're a leading provider of offloading and loading equipment for LNG, along with the technologies that support the drilling and completion of gas wells to supply these projects.

So overall, while the first quarter was very disappointing and our outlook remains less certain than we'd like, we see emerging pockets of demand and signs of recovery that provide a more constructive backdrop for the potential recovery later in the year.

Nevertheless, the first quarter is also a reminder that we can only control what we can control and that a renewed focus on costs is warranted, all while we continue to position the company to take advantage of the opportunities that present the greatest returns.

To our dedicated employees, thank you for all that you do to continually improve our organization and our industry. You're tough and resourceful, and our team and our shareholders are counting on you to help drive better results. Thank you for all that you do.

With that, I'll turn it over to Jose.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [4]

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Thank you, Clay. Before jumping into the results of our operations, I'd like to cover a couple of items related to our balance sheet.

Effective January 1, 2019, we adopted the new U.S. GAAP lease accounting standard, resulting in a $590 million addition to our assets and an equal amount to our liabilities. In the first quarter of 2019, working capital increased $162 million primarily due to a $145 million build in our inventory. Finished goods that we expected to ship and translate into revenue during the quarter did not make it out the door due to customer deferrals, and we took receipt of raw materials in anticipation of future orders.

Declines in AR were largely offset by declines in current liabilities. While we are not pleased with the magnitude of the increase in working capital, we are confident that in Q2, we will resume progress toward realizing our goal of working capital as a percentage of annualized revenue run rate below 35% by year-end.

Turning to results of our operations. Our Wellbore Technologies segment generated $807 million in revenue during the first quarter of 2019, a decrease of $77 million or 9% sequentially. Lower volumes and pricing pressure in North America for certain products drove decremental EBITDA margins at 49%, resulting in a $38 million decrease in EBITDA to $117 million or 14.5% of sales. The segment's short-cycle, activity-driven product offerings performed as anticipated during the quarter, but the capital equipment components within the segment, namely our Drill Pipe business, suffered the same customer-driven equipment deferrals and a slow-to-develop order book that impacted our other segments.

Customers deferred first quarter deliveries of new drill pipe into the second quarter due to the sharp fall in oil prices during Q4 and the corresponding reductions in U.S. land drilling activity. The result was a much sharper-than-anticipated falloff in revenue, snapping Grant Prideco's streak of 3 straight quarters with double-digit percent revenue increases.

Improving commodity prices, a less-than-feared pullback in drilling activity and drill pipe inventory levels that remain at historic lows brought back orders from North American customers in late Q1, albeit at a slower pace than in the last few quarters. Any momentum lost in the North American market was more than offset by a meaningful pickup in orders for international and offshore markets. Despite breaking our revenue growth streak, we achieved our fifth straight quarter with bookings in excess of $100 million and realized our highest quarterly bookings since 2014. While we're still quite far from achieving the average order intake we saw during the prior peak, we're seeing more indications of a sustainable recovery in demand for our premium drill pipe.

Wellbore Technologies' other activity-driven and less capital equipment-oriented businesses performed in line with our expectations, and their revenue in the U.S. outperformed the falloff in domestic drilling activity. Our ReedHycalog business unit realized a 4% sequential decrease in revenue. The customary sluggish start to the year in international markets was partially offset by a 7% sequential increase in our U.S. drill bit business. Improved pricing and continued market share gains in West Texas drove the increase in revenue, and early wins from a cost reduction and an efficiency improvement initiative resulted in meaningful incremental margins in U.S. operations.

In addition to reducing the cost of our support functions, each of our business units is also working to improve operational efficiencies. ReedHycalog has identified opportunities to achieve $22 million in annual margin improvement by the end of 2019 through initiatives to reduce product costs, repair and maintenance cycle times and supply chain inefficiencies.

While ReedHycalog's downhole measurement and steerable technologies product line had sequential revenue declines, both businesses expanded their geographical reach into new markets around the world. Customers deployed our Tolteq MWD iSeries tools for the first time in Mexico, in Turkey and the Middle East, and we secured our first long-term rental contract to deploy VectorEXAKT rotary steerable tools in the MENA region. In our Downhole business unit, revenue decreased 6% sequentially. Strong Q4 sales of fishing and drilling tools in the international markets did not repeat, and lower levels of U.S. drilling activity offset continued market share gains and pricing improvement in our U.S. drilling motor business.

We have been able to command better pricing for all motors due to the superior performance and reliability resulting from technical innovation and manufacturing quality. Our Downhole business unit is also executing on initiatives to improve operational efficiencies. The business unit has recently optimized its global realigning infrastructure, shutting down a plant in Belgium and relocating assets to remaining hubs in Dubai and Nisku, Canada, where we are focused on reducing manufacturing costs through product design and process improvement. The unit is also working to optimize field infrastructure by closing 2 service facilities in Canada and redeploying tools and equipment to the U.S. and other markets.

In our WellSite Services business unit, revenue decreased 9% sequentially, back to levels realized in Q3 of 2018. Strong sales of screens and capital equipment near year-end did not repeat, and job counts for our U.S. solids control operation decreased in line with drilling activity levels. Margins in our U.S. solids control business improved due to better pricing on shaker screens and better management of labor costs. Lastly, our Tuboscope business unit posted a 2% sequential increase in revenue. An increase in Eastern Hemisphere OCTG pipe inspections and contributions from 2 small acquisitions were mostly offset by declines in our coating operations, resulting from the sharp reduction in activity from Grant Prideco.

In the second quarter of 2019, we expect a meaningful recovery in our Drill Pipe business and improved demand from the Eastern Hemisphere to more than offset lower-average drilling activity levels in the U.S. As a result, we expect revenue for our Wellbore Technologies segment to improve 3% to 5%, with incremental margins in the 30% range.

Our Completion & Production Solutions segment generated $581 million in revenue during the first quarter of 2019, a sequential decrease of $207 million or 26%. Revenue was below expectations primarily due to greater-than-anticipated restraint by North American oilfield service customers and a steeper-than-expected decline in our offshore businesses, with new orders not booked in time to generate expected revenue. All business units reported double-digit sequential revenue declines except for XL Systems, which is executing on an all-time high backlog achieved last quarter. A sharp falloff in revenue and a less favorable mix of business led to 41% decremental EBITDA margins and an $84 million sequential decrease in EBITDA to $28 million, the lowest level seen through the downturn.

After a very slow start to the year, orders improved sharply in the last month of the quarter and totaled $470 million, equal to our bookings in Q4. Total segment backlog at quarter end was $1.41 billion, an increase of $147 million from the fourth quarter.

Our Intervention & Stimulation Equipment business unit saw revenue fall by 25% sequentially. We anticipated a sharp decline due to a depleted backlog for pressure pumping equipment and softening demand for wireline units, but customers stepped on the brakes harder than expected and also deferred deliveries of coiled tubing and other equipment. As Clay described, customers began returning to place new orders during March, and the business unit finished the quarter with its highest quarter-ending backlog since the second quarter of 2015.

Despite the temporarily deferred deliveries in North America during Q1, demand for coiled tubing remains robust and we booked sales of 22 additional units, with notable increases coming from international markets where customers are emerging from the downturn, cognizant of the contributions modern equipment and technology made to the economics of production in North America over the last decade.

In Q1, our ISE business generated roughly 50% of its revenue from international markets, and we anticipate this percentage will increase over the coming quarters as the composition of our backlog looks very different today compared to the last 2 years.

Our fiberglass systems business unit also posted a sharp sequential decrease in revenue as order intake deteriorated in Q4 and remained depressed through the first 2 months of the year. Orders rebounded sharply at quarter end after international customers finalized 2019 budget decisions, and West Texas midstream infrastructure companies reemerged with strong orders as commodity prices improved and they reaffirmed the basin's enormous need for produced water infrastructure. March orders accounted for approximately 60% of bookings and resulted in the business unit achieving its highest-ever quarter-ending backlog.

In our Process and Flow Technologies business unit, revenue fell sharply after the completion of major offshore wellstream processing projects in Q4. Additionally, large shipments of pump packages to the Eastern Hemisphere did not repeat, and the North American market was sluggish. While Canada and the Mid-Continent remain challenged, we are seeing renewed interest in the Permian, Bakken and U.S. Rockies for our reciprocating pumps, chokes and closures. International markets also came back to life as the quarter progressed, with demand for production pump packages picking up in Southeast Asia, Latin America and Africa. Notably, roughly half of the business units' bookings came to our wellstream processing operation via 2 monoethylene glycol reclamation and regeneration units destined for Asia, which help to replenish depleted backlog in this operation.

Clay touched on the dynamics associated with the offshore market components of our CAPS segment. Our Subsea Production Systems business unit, Floating Production Systems business unit and the wellstream processing portion of Process and Flow Technologies each experienced sequential revenue declines of between roughly 40% and 50%. While improved bookings in Q1 give us confidence in the short-term improvements and emerging signs of additional greenfield projects give us optimism longer-term, our offshore backlog remains uncomfortably low. A high level of tendering activity continues, but there is no guarantee that projects will not push to the right as has frequently occurred over the last several years.

Looking at the second quarter, we expect revenue in our Completion & Production Solutions segment to improve roughly 15%, with incremental margins in the upper-20% range.

Our Rig Technologies segment generated $603 million in revenue, a sequential decrease of $201 million or 25%. A higher-margin mix of business with a higher proportion of revenue from sales of aftermarket parts and services as well as cost controls limited decremental margins to 23%, resulting in a $46 million decrease in EBITDA to $56 million or 9.3% of sales. The wind-down of certain offshore projects and customer-accelerated deliveries near year-end impacted Q1 results as expected. However, slower-than-anticipated progress on remaining projects and a loss of customer urgency for land rig upgrades resulted in a sharper-than-anticipated decline in revenue. Our Aftermarket business realized a 4% sequential decline in revenue primarily due to the seasonal falloff in service and repair work that Clay described. Our Aftermarket business realized an 18% increase in revenue year-over-year, driven in large part by increased spending from offshore drilling contractors as they replenished their spare part inventories from unsustainably low levels.

Rig Technologies segment orders totaled $271 million, a sequential increase of $152 million or 128%. Headlining the order book was a drilling equipment package for the BP Azeri Central East platform in the Caspian Sea offshore, Azerbaijan. In the recent past, we stated that we did not see many near-term offshore newbuild opportunities outside of a few niche applications. We've worked closely with BP and their ACE project partners over the past 2 years, and we are excited to work with them on this unique platform that is expected to achieve first production in 2023 and produce up to 300 million barrels over its lifetime.

We anticipate our aftermarket operations will continue to realize gradual improvements, but expect continued volatility in the capital equipment portion of our Rig Technologies segment as we continue to operate near cyclical lows, limiting visibility into our mid- to longer-term outlook. However, for the second quarter, we expect improved aftermarket revenue and better progress in offshore projects to be partially offset by lower land capital equipment sales, resulting in a 5% to 10% increase in revenue, with incremental EBITDA margins in the upper-20% range.

While we had a challenging start to the year across all 3 segments, we built momentum through the quarter and grew our backlog, positioning us well for improved financial results in the second quarter. Longer-term, growing signs of a broader recovery give us optimism for better days ahead, and we know our talented people and the product offering they developed have us well positioned to capitalize on opportunities that emerge. But we are also firmly committed to delivering improved financial results at current industry activity levels.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Byron Pope with Tudor, Pickering, Holt.

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Byron Keith Pope, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [2]

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And congratulations on managing through a pretty tough environment. Clay, you touched on this as it relates to Rig Technologies, but I think it's underappreciated the extent to which NOV provides a lot of aftermarket and consumables products and just given it feels like U.S. land rig count is in the process of stabilizing in the next couple of months and international is trending in the right direction. Could you just frame for us for Wellbore Technologies and CAPS the way to think about either aftermarket or consumable systems to help us think about your baseline level of demand?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [3]

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You bet, you bet. Yes, the Completion & Production Solutions group also provides a lot of capital equipment as well, and each of those business units does provide a lot of aftermarket support to support an installed base out there. So for instance, our Process and Flow Technologies group within CAPS, a big portion of their business is the ongoing support of its large installed base, so progressing cavity pumps and reciprocating pumps and production chokes and things like that. And that's true kind of throughout the business units there within CAPS.

And then in Wellbore Technologies, we do sell some capital equipment. Our WellSite Services group is a leader in the provision of solids control equipment, for instance, and we provide aftermarket support of shale shakers and centrifuges and other process equipment that's in the field. But if the nature of those tends to be a little more consumable, so the shale shakers will go through a shale shaker screen every -- or have to be completely rescreened across the deck every week or so, so that's really a nice ongoing sort of support for that equipment. So really, it varies across all 3 segments, but all 3 segments have aftermarket and consumable elements to their businesses that our customers demand.

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Byron Keith Pope, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [4]

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Okay. I appreciate that. And then just one quick additional one. If I think about the international side of the business for Wellbore Technologies, could you just frame for us at a high level which geo markets you think drive the international top line growth for Wellbore Technologies based on the opportunity set that you see today?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [5]

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Yes, the strongest geo market that we've seen through the downturn has been the Middle East in the North Africa region, and we've been investing in that area and I think the growth prospects there are really bright. We had a lot of strong sales in Wellbore Technologies in the fourth quarter. Some of the -- for instance, some of the bid tenders and things like that tend to come in big packages. And we had a couple of those go out the door in the first quarter that led to part of the falloff that you saw there in Wellbore Technologies in the first quarter.

But the good news for us is that we have won some important tenders in North Africa, in the Middle East in the first quarter that will contribute to future quarter results. So we're pretty optimistic about the future for that area. But I tell you, as you know, Wellbore Technologies is present in every major oilfield basin around the globe, and our fortunes are tied to those individual areas, kind of their outlook for activity and so forth. And so customers around the world rely on NOV technology and Wellbore Technologies to support their operations.

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Operator [6]

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Our next question is from Bill Herbert with Simmons.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [7]

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Clay and Jose, I think I heard you correctly saying that your frac-related sales in Q4 were down, close to 60% quarter-on-quarter. Was that correct?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [8]

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Yes. In the U.S., pressure pumping sales in the U.S., down 58%.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [9]

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Okay. Could you break that out between OEM versus consumables and spare parts and repair and maintenance?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [10]

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I don't have the breakout here in front of me, but I will tell you that all of those U.S. pressure pumpers are pretty good at stopping spending of everything. So it was both OEM capital equipment and aftermarket that felt the brunt of the round of capital austerity that we've all been hearing so much about.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [11]

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So notwithstanding the unrelenting service intensity of the business that is the frac business, consumables and repair and maintenance slow down, and I'm just curious as to what their inventory is with regard to being able to sustain a cessation in consumption based upon the service intensity.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [12]

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Bill, I'll first chime in and say that, yes, it was, across the board, a slowdown but the new capital equipment piece was certainly a higher percentage than what happens related to the ongoing consumable portion of the business. But really, what you're raising is a really good point related to how sustainable is their ability to sort of postpone the inevitable, which is really taking care of a large equipment fleet that gets used day in and day out, out in the field. And our service customers can certainly slam on the brakes and screeches just about everything to a halt for a period of time, but to some extent you're delaying the inevitable, right? You have to continue to take care of the equipment. If North America oil and gas operators want to continue to see efficiency improvements in operation day-to-day, whether that's fewer days to drill, more stage count each and every day, customers have to take care of their equipment. I don't want to imply either that our customers are not taking care of their equipment and setting themselves up for issues, but what I am implying is that you can delay things for a limited period of time before that catches up to you.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [13]

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Okay. And then, Clay, the last one for me. I am a little bit confused by the performance of the offshore-related piece in CAPS in Q1 and moreover, the persuasively constructive broad-based narrative that's unfolding during Q1 earnings season about a blossoming in offshore spending. How can you reconcile those 2?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [14]

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Let me clarify that. We -- if you go back a couple of quarters, the middle part of 2018, we were saying, kind of based upon our near-term order book, we were expecting our offshore businesses within CAPS to bottom probably in Q4. When we got to Q4, if you'll recall, we said, well, we didn't bottom because we pulled deliveries out of Q1 and made those deliveries before year-end. So we sort of depleted the cupboard rolling into the new year. And so the Q1 results that you see now of offshore products within the Completion & Production Solutions group reflect that.

Yes, we're well aware of the sort of blossoming narrative out there, the rising level of optimism in the offshore around operators moving forward with FIDs and offshore field developments, and we are very excited about that. But it will take a little time for that to show up in our P&L.

We are already seeing the green shoots of that in the order book in Q1. It just didn't show up as revenue. And -- but yes, we agree with kind of what I think is the growing conventional wisdom out there that the offshore is finally starting to come back. And we're also seeing that clearly in our Rig Technologies area, where we're now working on 20 rigs, for instance, that are -- that were stacked that are being reactivated to tender on this growing body of work. So I hope nothing that we presented is outlying with that improvement in offshore that we see, but that's kind of where we are right now.

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Operator [15]

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Our next question is from Kurt Hallead with RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [16]

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Thanks as always, guys, for all the good info and insights on what's going on in the marketplace and how you're trying to kind of manage through it. I know, clearly, it's not an easy dynamic. So Clay, in that context, right, as you kind of go through the process of kind of controlling what you can control and kind of looking at kind of an internal focus dynamic, I just wonder if you could provide some additional insights along the lines of is it facility kind of rationalization, product line rationalization. Just some additional insights as to kind of how you might see it evolve as the year goes on...

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [17]

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No, I appreciate the question, Kurt. Yes. I would say, 2 areas of focus, the first and perhaps the most impactful is going to be around the administrative support functions that support our business units. And as you are aware, and probably many listeners are aware, we've long had a very decentralized model where we sought to very clearly place responsibility and authority in the hands of our business unit and product line leaders and give them a lot of autonomy over how they manage their product lines and their business units globally in exchange for the accountability to earn return on the capital that they manage on behalf of our shareholders. And I think that's the best way to drive the best performance out of those business units and product lines. And what that has entailed has been an awful lot of functions that go into supporting a business.

When we think about different ways to sort of organize ourselves, and I want to be completely clear on this, I think maintaining that decentralization, that sort of entrepreneurial spirit amongst our business unit leaders is critical, but the various functions that support those businesses, some are more strategic than others. And so we sort of prioritize those areas like sales, manufacturing, operations, engineering, and support of those product lines, I think, is critical, remain in the hands of our business unit leaders that we rely on to drive returns out of those businesses. But other administrative functions, perhaps, there's a better way. And so this next round of cost savings is likely to involve a reexamination of those support functions, how centralized are we, can we use more shared service models around the globe to support these businesses. And we expect that to drive some level of cost savings. So that's kind of the first area.

The second area is within the business units themselves, a number are still not at the margin levels that they need to be at. And they've renewed their focus on reducing their cost inefficiencies. I think Jose touched on a couple specific business units in Wellbore Technologies and elsewhere that are really looking hard at how they manufacture, where they manufacture, that sort of thing. So that's going on down kind of more in the business units. And we also expect that to be fruitful. So it's really both of those things.

With respect to facilities closures, we -- through the downturn, we've closed over 400 facilities. We closed 14 facilities in the fourth quarter. We closed 12 in the first quarter. We have -- I expect we'll have some follow-on facilities closures as well. But I think those kind of first 2 areas, the administrative functions and how we're organized and then the actual cost of goods sold, cost structures in our business units are kind of the main 2 areas that we're looking at.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [18]

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That's great. And maybe if I can have one additional follow-up on that. Seeing in the context of your guidance you provided for the second quarter, the highest growth rate coming in Completion & Production systems, I heard your commentary about the dynamics at play with the U.S. service companies, frac service companies, kind of squeezing on CapEx and everything else. So on a very, very near-term basis, when you look at that 15% growth rate, what is the primary -- or what are the few primary drivers of that rebound that you expect to see in the second quarter?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [19]

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Well, the short answer is the 1.4x book-to-bill gives us more confidence. It did -- a lot of that -- more than half of that came in -- or about half of that came in, in March, and so we have a fair amount of confidence around the second quarter guidance. And so that's the answer for that.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [20]

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Any specific kind of product areas? Is it the fiberglass that's driving that? Is it coiled tubing that's driving that? Just general, maybe some additional insights on it.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [21]

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Really, Kurt, it's almost equal across the board. So Q1 was a little bit of a perfect storm, right? We had a lot of the offshore businesses still reaching for bottom, and then we had this huge wave of capital austerity hit the North American service company marketplace before international markets had really set their budgets and gotten prepared to get back to work. So as it relates to Q2, we see all 3 of those legs of the stool sort of picking back up and contributing to that top line growth.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [22]

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I think a lot of operators across the oilfield, when oil was trading down so hard late November and into December, just sort of put the brakes on all buying and then -- in lockstep, and then January, February, it remained pretty muted. As oil prices have recovered, I think that's led to more purchase orders from lots of different corners of the globe coming in just generally. The only real exception to that, or at least the one that I can think of right now, would -- might be North America land drillers, which they actually continued to slow through February and March and into April. But most of the other parts of the oilfield, it felt like it's -- people were kind of getting back to work.

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Operator [23]

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And our next question is from Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [24]

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So Clay, maybe to start off, I was thinking about the relatively shorter-cycle businesses of Wellbore and CAPS, the decrementals in the first quarter were more severe than the incrementals that you're guiding, and you're guiding towards what seemed like the low end of what you've been targeting this cycle as far as incrementals. It would be great just to get a little more insight. What are you learning about this cycle in terms of how the operating leverage is working for those businesses as we -- you know more than you did, say, 4, 6 quarters ago, it would be great to get a little more insight into how you're thinking about that.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [25]

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Well, Wellbore here, the high decrementals around the 9% sequential decline, 49% decrementals, first, we guided to, I think, 40% or low-40% range. So it was a little higher than we guided to. Half of the top line decline came out of the Drill Pipe business, which historically has been a high-leverage business, number one. Number two, we are under more pricing pressure in Wellbore Technologies in certain product lines, particularly downhole tools. That took a toll. And I would add to that, I think some of our solids control products are under more pricing pressure as well. We had a project wrap-up in South America that took a toll on decrementals.

We also have a phenomenon, and this isn't news to us, but when you do have a slowdown in activity, rental tools that have been out in the field working and generating revenue, they come back to the shop and we spend a little money taking those apart and seeing what's damaged and replacing things and fixing them and getting tuned up to go back out again. So your expenses actually go up. So that little corner of our business has always had sort of high incrementals and decrementals.

What I -- in terms of what I have learned, I have learned that when you have to face rising steel cost because of the steel tariffs, it's tough to claw that back in pricing and gets doubly tough when oil declines to $45 a barrel in Q4. And so I think we're passing through some choppiness, some cost challenges, things like that, that we're having to deal with. But look, our entire team spent our entire career in oilfield services. I don't think there's any new here we hadn't seen before.

The other thing too, Sean, I would say our Completion & Production Solutions business, there are consumables and aftermarket embedded, and I think that's still mostly a capital equipment kind of business and as we've characterized in the past, more of an offshore products business.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [26]

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And Sean, I think I'd add, related to the CAPS segment and the decrementals that you saw there, is obviously, really, as it relates to both those segments. Volumes fell harder than anticipated, and that also obviously contributed to generating a higher decremental. But within the CAPS segment, as I just previously mentioned, we had a little bit of the perfect storm, and Q4 was obviously a good quarter across the board. We had a pull-forward and sort of an extension of what we expected related to a bottoming of the offshore components of the business that were somewhat, to some extent, relying on some offshore bookings that were booked at a better portion of the cycle. And so it's kind of good news, bad news. Bad news is the decrementals that you saw this quarter. The good news, from our standpoint, is that from this point forward, most of the businesses should be moving in a similar direction and we should -- and we're a lot more confident about the ability to predictably generate incrementals that are more in the upper 20s to lower to mid-30s for that segment.

Up to this point in time, we've had, since the bottom of the downcycle, we've had the North American-centric businesses improving on the bottom, off the bottom, while the offshore was still bottoming out at pretty high decrementals. So we're finally at the point to where we think everything has found the bottom, and we should have most businesses aligned in the same direction.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [27]

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Got it. I think both of those comments were insightful. I appreciate that. Similar, I suppose, I mean preannouncements aren't common in your history, which I guess is probably in contrast to many of your customers in our coverage. So as this -- as you've made a concerted effort to move towards a shorter-cycle portfolio, you're trying to gauge where the puck's going, does this make the overall business harder to forecast? Or how do you think about how that facet of your job has been changing the cycle as the portfolio shifted?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [28]

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Well, first, as you know, we have a very diverse portfolio both across products and consumables and aftermarket and spare parts and sectors of the industry we provide. And secondly, geographically around the globe. But what I'd say is it's rare to have a 19% sequential decline in revenue. And I think Jose made this point earlier, the -- just evaporation of orders from North American pressure pumpers as well as the bottoming of offshore backlog for us in the same quarter was kind of the double whammy in terms of a big picture here.

But as you're well aware, NOV is the leading provider of capital equipment and aftermarket support in most of the individual oilfield service verticals that do most of the well construction activity globally. So oilfield activity is a highly cyclical business, it's never been easy to forecast, but this was a particularly sharp decline coming after the quarter in which we saw a particularly sharp decline in crude prices, in fact, one of the steepest declines on record, I think. So I think those 2 things are really linked together. And hopefully, we'll see more stability going forward.

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Operator [29]

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And our next question comes from Chase Mulvehill with Bank of America.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [30]

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So I guess a question on the cost savings. In your guidance, are you able -- in 2Q, are you going to see a benefit from cost savings? Or is that kind of more in the back half of the year in 2020?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [31]

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It's going to take 3 or 4 quarters. As we mentioned, it's a more structural sort of thing and a heavy -- a heavier lift. And so I think realistically, this is going to take 3 or 4 quarters to unfold. We do expect to start to see a little bit of that in Q2. And I think that's baked in Jose's guidance, but it's going to take a little while to unfold.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [32]

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Can you talk a little bit about the cost savings? Which segments? It sounds like it's kind of turning to a little bit more outsourcing on the supply chain. Just a little bit more color will be helpful.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [33]

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Yes, not really outsourcing on the supply chain, but again, more -- what I'd say is more administrative support of our various business units and product lines globally. So we operate through 14 business units in 66 countries, and there's a lot of sort of overhead that goes along with that. And as volumes -- we're making good progress on the recovery. We had 10 quarters since the beginning of 2016, where we saw rising revenues, rising profitability, moving towards recovery. For us, this quarter was a signal that, hey, that may be a little further out than we would like and we really need to roll up our sleeves and get back to taking a hard look at the administrative support of our business units.

In terms of outsourcing or supply chain, again, there will be some changes there, but by and large, I view that as a strategic function that will continue to have a lot of oversight from our operations. And -- but along with other manufacturing, engineering, the more strategic functions that I mentioned earlier. But we do think this is the right thing to do for the company and -- at this point in time. And it's complicated, it's a heavy lift, it's painful, but necessary.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [34]

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Okay. Helpful color. Last one. Just on the aftermarket in the Rig Tech segment, could you maybe just talk to the 2019 outlook and what kind of growth you expect? I think you said it was 54% of revenues. If we look at that kind of on a year-over-year basis, just maybe kind of guide us to kind of how you're thinking about that from a growth perspective.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [35]

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Yes, I think -- I don't know this precisely. I think it was up high single digits or maybe low double digits year-on-year. Although it was down sequentially, which always is seasonally, a lot of our customers in the fourth quarter wrap up equipment, repair, refurbishment activities and then they kind of restart in Q1 with new budgets. So we also saw in the first quarter, which is very encouraging, the highest level of spare parts bookings that we've seen since, I think, early 2015. And it had a little more of an offshore flavor to it, and it was, I think, tied to this phenomenon that I described earlier about more offshore rigs going back to work and replenishing stocks of spare parts.

So if the narrative that we think we're seeing out there of more offshore projects being FID, more offshore drilling underway, more rigs readying themselves to bid into that continues, I think we're going to continue to see more growth in aftermarket demand to support those activities by our customers. And again, with the largest installed base in offshore rig equipment out there, I think NOV is really well-positioned, and we're enhancing the value that we add into those activities, utilizing these digital products that we've been working on. So we're -- a lot of these rigs that we'd built over the past few years were instrumented for condition-based monitoring. And we're actually discovering as we're going through rig reactivation activities with our customers the ability to have experts around the world monitor what's going on, on the rig as systems are restarted, that's a big plus.

And so again, we've been steadily and quietly investing in our aftermarket capability, and I think as the industry gets back to work offshore and there's more drilling, we'll certainly be a beneficiary of that.

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Operator [36]

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And our last question comes from James West with Evercore ISI.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [37]

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So Clay and Jose, if we think about North America is not going away, it's going to churn equipment, we know there's a lot of structural equipment in quick-cycle business, international better, offshore better. Can you remind us roughly of the buckets of kind of revenue or earnings that are generated by those 3? Because I think there's some misinformation out there that you're only supplying frac spreads into the U.S. market.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [38]

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Yes. Let's disabuse everyone of that notoriety. We sell well intervention and stimulation equipment globally. So yes, in the first quarter, our mix was 66% land and 34% offshore, and our first quarter revenues was 45% North America and 55% international on a consolidated basis. Is that what you're...

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [39]

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That's got exactly what I'm looking for. Yes, yes. I think that's a good point to hammer home because that's what's probably dropped too far, especially if 1Q was a perfect storm, as Jose alluded to.

I think that, secondarily, maybe it's a broader topic and it's been asked a couple of different ways so far, but I get the decentralization. We do live in a different world now for spending on equipment in a capital-disciplined-type world, but we're going to need equipment. Do you need to do -- outside of the cost savings you talked about, some facility closures here and there, does there need to be a bigger strategic review of your global operations?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [40]

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I -- in terms of a strategic review, what I would tell you is that we're always going through our portfolio of businesses. We had a divestiture last year. We're in the process of looking, and I think we're close to divesting other smaller businesses. James, you've heard us talk before, when it comes to acquiring businesses, we need to be a better owner, and that's kind of something that we look for, how can NOV bring more value to that enterprise and be a better owner of it. Likewise, the businesses that we do own that are not earning good returns on the capital we have invested in them, I think we have an obligation to divest those businesses. And so we do periodically kind of look at their performance and have made some divestitures, and I would expect that we would continue to.

But in terms of our overarching, NOV as the leading provider of capital equipment to oilfield services, I like where we're at. We went through a detailed review of the strategic and competitive advantage implications of that positioning in the oilfield. And I think the differentiated model that we operate here at NOV is unique and it's compelling. I think it's incredibly hard to replicate by others. And although -- and I might add too, we also highlighted that it's perhaps a little more volatile than others in the oilfield because of the nature of what we do. I think we saw a little bit in the first quarter, but in the long run, I think this is a great way to earn a good return on our shareholder's capital.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [41]

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That's great to hear. Okay. Clay, just so you know, you, on our metrics, our proprietary metrics, you ranked the best of the entire oilfield service group on shareholder alignment.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [42]

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Thank you.

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Operator [43]

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Thank you, and ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to Clay Williams for his final remarks.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [44]

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Thank you, Carmen, and thank you all for joining us this morning. We look forward to updating you on our actual second quarter results on our call in July. Have a great day.

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Operator [45]

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And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program. Have a wonderful day.