U.S. Markets closed

Edited Transcript of NOV earnings conference call or presentation 30-Jul-19 3:00pm GMT

Q2 2019 National Oilwell Varco Inc Earnings Call

HOUSTON Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of National Oilwell Varco Inc earnings conference call or presentation Tuesday, July 30, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* 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

* Coleman Wayne Sullivan

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* James Marshall Adkins

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Scott Andrew Gruber

Citigroup Inc, Research Division - Director and Senior 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Second 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and welcome everyone to National Oilwell Varco's Second 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 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. Reconciliation to the nearest corresponding GAAP measures are in our press release available on our website. On a U.S. GAAP basis for the second quarter of 2019, NOV reported revenues of $2.13 billion and a net loss of $5.39 billion or $14.11 per share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our press release. Later in the call, we will host a question-and-answer session. (Operator Instructions)

Now let me turn the call over to Clay.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Loren. I'll begin by briefly summarizing our second quarter results, then I'll discuss working capital, the impairment charge and our cost savings progress before handing it over to Jose to delve into each of these topics in greater detail.

As Loren mentioned, in the second quarter 2019, NOV generated $2.132 billion in revenue, an increase of 10% sequentially and an increase of 1% year-on-year. Adjusted EBITDA was $195 million, up $55 million sequentially, representing 29% incremental leverage to our first quarter 2019 results. EBITDA fell 14% year-on-year on mix and pricing pressure. Each of our 3 business segments improved sequentially. Incremental demand for our capital equipment, consumables and services from international markets drove sequential consolidated growth of 18%, which lifted our mix from international markets from 55% in the first quarter to 59% in the second quarter.

Revenues from North America were held flat sequentially despite the second quarter pullback in activity in North America. Company-wide bookings grew for the third consecutive quarter as international operators continued to steadily grow activity around projects that have been waiting on the sidelines over the past few years. So NOV put up better sequential growth at the top line, but we did a poor job managing working capital this quarter, which was a use of cash due to slower payments from customers, declining payables balances and modest inventory builds, related to new orders and delayed acceptance of completed equipment by customers. This was disappointing in view of the changes that we have made and discussed publicly around better working capital management.

As a brief reminder, when NOV's revenues were declining in 2015, we implemented an economic value-added compensation metric to increase the organization's focus on capital returns, including working capital. In late 2017, we observed that our working capital intensity was still too high so we changed to a working capital-specific modifier to incentive compensation, while keeping the economic value-added concept for longer-term compensation. We witnessed some success in this arena in 2018 as working capital decreased as a percent of annualized revenue from 44% to 37%. However, our first half 2019 results reversed this trend and are going in the wrong direction. NOV has a long track record of free cash flow generation, owing to the low fixed asset intensity of our business model. We will improve free cash flow through the second half of 2019 by making additional modifications and driving higher levels of accountability among our managers. Our working capital intensity remains too high, and we will bring it down through the second half, which will improve cash flow, and Jose will expand on this more in a moment.

Next, during the second quarter, the company recognized a significant impairment of the carrying value of its goodwill and intangible assets arising from, among other factors, the higher cost of capital that many of our oilfield service customers are now facing. The second quarter saw the OSX index of publicly traded oilfield service firms trade off 14% sequentially to levels not seen since the early 2000s, indicative of the challenging market expectations our oilfield services customers now face as their customers, the E&P operators, adopt capital austerity and are doing more with less. Most of the intangible and goodwill impairment charge stems from large public-to-public transactions that occurred in a vastly different market environment, one in 2008 and another in 2013. Rightsizing the balance sheet in the second quarter was a necessary step, triggered by the developments in the marketplace and brings us in line with current market expectations.

Turning to cost savings. Last quarter, we announced our intention to achieve a new annualized cost savings target of $120 million a year by further rightsizing our organization, both corporate functions as well as operations. Through the first 3 years of the downturn, we reduced personnel-related costs $3 billion and SG&A $1 billion per year, so these latest initiatives are additive to our earlier efforts.

During the second quarter, the company enacted a voluntary early retirement plan and embarked upon the redesign of several administrative functions to move NOV closer to a shared services model. We achieved approximately $7 million in annualized savings that contributed partially to our Q2 results; more importantly, we identified and are executing dozens of changes to our processes to capture significantly more savings. We currently estimate that we can achieve $160 million in annualized savings based upon these steps which should be fully completed by the end of 2020. As we mentioned on the last call, this is a heavier cost savings lift than we've executed previously since most involved some level of process redesign which will take 6-or-so quarters to fully enact. NOV has always sought to cultivate an entrepreneurial culture, where our operating managers have real authority and autonomy over the critical strategic resources they need to execute their business plans.

We will continue to give them this in exchange for accountability and responsibility for earning a return on the shareholder capital, including the working capital that they are entrusted with managing. We do not intend to change this formula. Rather, we are seeking to drive better efficiency from administrative functions, less overhead, better pricing for common, nonstrategic inputs they utilize in their businesses. Our revised cost savings target is expected to be comprised of roughly half coming from corporate and shared services and half coming from operational initiatives that will improve cost of goods sold and gross margins, including several facilities that we have closed year-to-date. While further reducing our footprint, these changes will not reduce our ability to respond to future increases in demand for the products and equipment that we're best known for. However, we were also currently reviewing certain products and businesses that are not earning an acceptable return for possible closure or divestiture.

Before I hand it over to Jose, I do want to point out that I found much in the second quarter to be encouraged about. Top line outperformance versus the change in rig count, both in North America as well as international markets, together with sequential improvements in margins in all 3 segments, was enabled by new products and technologies we brought to market through the downturn, many of which are highlighted on our significant achievements. Our organization is finding new markets for our technologies, in places like marine construction and offshore wind. Our targeted investments in areas like fluids and gas processing technologies, composite piping systems, the disaggregation of directional drilling services from equipment, et cetera, are built on our view that returns on capital in the long run are determined principally by competitive advantage. We continue to position NOV's businesses in thoughtful strategic ways, including the organic development of new products and technologies to maximize competitive advantage and economic performance and improve capital efficiency. We are encouraged by our improved order rates and steady recovery overseas and the internal steps being executed to drive better results.

To our employees listening, your hard work, perseverance and professionalism make NOV special, and I appreciate how you've responded to all that you have been asked to do to enable NOV to weather a tough oilfield downturn. Thank you. We have many friends here who will be retiring, and to our teammates, who will be leaving us, NOV is a better organization for you having served here. Thank you.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Clay. NOV's consolidated revenues improved 10% or $192 million sequentially as momentum continues to build in international and offshore markets, benefiting NOV's longer cycle capital equipment businesses. Revenues from international markets improved 18% sequentially with all 3 segments posting double-digit growth outside North America.

Consolidated company book-to-bill of 1.3x also reflects the improvement in international and offshore markets. U.S. revenues improved 2% sequentially but were offset by the Canadian spring breakup, resulting in flat sequential revenues in North America. EBITDA increased $55 million sequentially to $195 million on 29% incremental margins. As Clay mentioned, we began executing on our cost savings initiatives in late Q2, realizing $7 million of annualized savings which translated into a $2 million direct benefit to the quarter. We anticipate our realization of cost savings will accelerate over the next couple of quarters and expect to see an additional $7.5 million benefit to the third quarter or another $30 million in annualized savings.

During the second quarter, SG&A increased by $113 million, the vast majority of the increase was due to the severance charges associated with our cost-savings initiatives. We're required to record the expense when the company commits to an action, creating mismatches between when expenses are reported and when cost savings are realized. As Clay mentioned, during the second quarter, we took $5.8 billion in charges primarily against goodwill and intangible assets. The impairment will reduce our Q3 depreciation and amortization expense by approximately $45 million in comparison to the second quarter, which will result in total depreciation and amortization expense of approximately $110 million in the third quarter. While 10% sequential revenue growth and the impact from impairments resulted in a slight improvement to our working capital as a percentage of our annualized revenue run rate, we were disappointed by the $73 million use of cash from operations. The shift of our revenue base from North America to international markets where time to build capital equipment and receipt of payments take longer certainly creates headwinds related to working capital. However, we know that we need to execute better. We're redoubling our efforts to improve management of working capital and continue to work toward our year-end goal of reaching working capital to revenue run rate in the mid-30% range, which underpins our expectation of generating $300 million to $500 million in free cash flow through the back half of the year. After improving our capital intensity through 2018, we've seen the first half of 2019 fall off trend, concurrent with our customers' hoarding of cash. But as Clay said, we are laser-focused on reducing the capital intensity of our working capital through the second half of the year.

Turning to our results of operations. Our Wellbore Technologies segment generated $850 million in revenue in the second quarter, an increase of $43 million or 5% sequentially. Improved volumes and cost savings drove incremental EBITDA margins of 40%, resulting in a $17 million increase in EBITDA to $134 million or 15.8% of sales. Revenue improved slightly in North America, where 2% sequential growth in the U.S. was mostly offset by the Canadian spring breakup. The segment capitalized on improving international market conditions to post a 14% sequential increase in revenue from international operations.

Our Grant Prideco drill pipe business recorded a sharp sequential improvement in its Q2 results. Customers in North America that deferred deliveries in Q1 took receipt of their pipe, and we continue to capitalize on improved demand from international and offshore markets. Inventories of drill pipe have fallen below record low levels, but customers in all major markets are capital constrained and are doing all they can to avoid spending. In North America, customers are slashing CapEx while rigs are coming out of service, but international and offshore customers have been forced to increase their spend to support rising activity levels and rig reactivations.

In the second quarter of 2019, international markets accounted for 66% of our drill pipe business units revenue, up from 42% in Q2 of 2018. Revenue from offshore markets reached 45% in Q2 2019, up from 17% a year ago. The shifting mix presents challenges, including longer lead times and payment terms that are more than offset by the opportunities realized from a higher percentage of larger diameter premium products.

Our ReedHycalog business unit also realized strong sequential growth in its international operations, particularly in the eastern hemisphere, where revenues improved over 10%. This growth was led by the Middle East, Asia Pacific and FSU regions and by a rapid expansion in a number of eVolve optimization service projects in the North Sea. Despite 2 quarters in a row of declining rig counts, the business unit posted a 6% sequential improvement in the U.S. during Q2 after realizing 7% growth in Q1.

Technology leadership that delivers record results for our customers allows us to gain market share and grow our revenue. An example of how this works took place in the Midland Basin during the second quarter, where an operator tried out our technologically advanced 8.5-inch Tektonic drill bit. The customer was able to drill an entire lateral section in 1 bit run at a rate of 283 feet per hour. Since 2016, this operator used 5 different bit companies and dozens of bit types to drill over 200 wells, yet our Tektonic bit significantly exceeded all previous lateral records. Last quarter, we mentioned that our ReedHycalog business unit began executing on efficiency initiatives that could achieve over $20 million in annual margin improvements by the end of 2019. These initiatives helped drive incremental margins in excess of 70% during the second quarter.

Revenue in our Downhole business unit increased 4% sequentially. Strong growth in Asia, the FSU region, Africa and Norway drove 14% sequential growth in the eastern hemisphere. In the U.S., growing operator preference for our line of advanced drilling motors, which continue to command premium prices, offset declining drilling activity. Improvement in Latin America was offset mostly by the Canadian spring breakup resulting in relatively flat revenue in the western hemisphere. Similar to ReedHycalog, technological innovation on our Downhole business unit drives our ability to gain share and grow revenue. Our series 50 motors and high-flow ERT power sections continue to help operators set records for drilling efficiencies, and we believe our SelectShift Downhole Adjustable Motor is ready to drive additional growth for this business.

After extensive in-well testing at our R&D technology center and 30 field trials, the tool has drilled over 110,000 feet, run over 1,300 drilling and circulating hours and completed more than 260 downhole shifts. With its ability to eliminate trips and improve both hole quality and ROP, it's not hard to foresee this tool becoming an industry standard for U.S. unconventional wells.

Our Downhole business unit is also making progress improving operational efficiencies. The unit is consolidating to fewer operational and manufacturing hubs, rationalizing infield support infrastructure to better match activity levels in key markets. The changes serve to improve responsiveness to customers, streamline product development and deployment, lower costs and reduce inventory levels. Efficiencies associated with these initiatives more than offset growing pricing pressure in North America for select products and services and allowed the business unit to post 36% incremental margins during the second quarter.

Our Tuboscope business unit posted a small sequential increase in revenue on increasing demand for pipe coating in international markets and further penetration of our TK liner product in the eastern hemisphere. Improving international demand was partially offset by softening conditions in North America as well as downtime that resulted from 2 separate natural disasters that affected production at mills where we provide inspection services.

Lastly, while WellSite Services business unit saw a small sequential decline in its revenues, strong sequential growth in the eastern hemisphere did not fully offset lower activity in North America, which impacted our solids control and fluids product offerings. While revenues contracted slightly, we received meaningful multiyear awards in select international plays, including Argentina and West Africa that will help lay the groundwork for future growth.

In the third quarter of 2019, we expect further declines in U.S. activity to offset continued growth in our international operations. As a result, we expect revenue for our Wellbore Technologies segment to decline between 1% to 3%. We expect cost savings will limit margin erosion to roughly 10 basis points.

Our Completion & Production Solutions segment generated $663 million in revenue in the second quarter, an increase of $82 million or 14% sequentially. Revenue from international markets improved 23% and revenue from offshore markets rebounded 18% from the bottom we established for our offshore businesses during the first quarter of this year.

Higher revenues drove 29% incremental EBITDA margins resulting in a $24 million increase in EBITDA to $52 million or 7.8% of sales. As we described last quarter, order inflows improved significantly during March and the increased pace continued through the second quarter, resulting in total bookings of $548 million, the largest quarterly order intake we have captured since the third quarter of 2014. Our offshore-oriented businesses accounted for a disproportionate amount of bookings, replenishing what we've previously described as an uncomfortably low level of backlog and giving us confidence that our offshore businesses found bottom in Q1 of 2019. Orders outpaced the $379 million in shipments, providing us with a 145% book-to-bill. Total segment backlog at quarter end was $1.22 billion.

Our Fiber Glass Systems business unit realized a sharp pickup in revenues with strong incremental margins by executing on sizable orders that came in late in the first quarter. Strong order inflows continued in the second quarter, allowing the business unit to post a 112% book-to-bill. The business continues to see healthy demand for large diameter composites pipe for produced water infrastructure in West Texas and for spoolable pipe in the Middle East. We've also seen a material pickup in demand related to offshore vessel scrubber systems that are needed to comply with IMO 2020 regulations. During our fourth quarter call, we highlighted the potential opportunity associated with retrofitting scrubber systems for larger modern vessels. That opportunity is playing out with bookings of over $30 million in the second quarter associated with the provision of highly customized high-grade composite solutions for customers seeking an economic means to comply with this important regulation.

Revenue for our Process and Flow Technologies business unit improved 7% sequentially on strong demand from international and offshore markets. Our production and midstream product line realized market share gains in certain key products, helping offset declining activity in North America. The wellstream processing business within PFT realized a healthy pickup in project activity, driving strong incremental margins. We were also awarded 2 additional LNG project-related monoethylene glycol units in June, bringing the year-to-date total to 3 secured project wins as well as 2 awards for FEED studies associated with potential future projects. We also won a sizable award to supply a submerged turret production system for a major deepwater gas and condensate project in the Bay of Bengal. The orders helped drive the business unit's book-to-bill of 2.7x and helped us achieve a record high backlog for this business unit at quarter end.

Our Subsea Production Systems business unit rebounded from a historical low in Q1, posting a 5% increase in revenue. Strong orders at the end of the first quarter continued into Q2 and resulted in a 38% sequential increase in bookings.

Finally, our Intervention & Stimulation Equipment business grew 16% sequentially despite the smallest contribution from pressure pumping-related equipment sales we've seen in roughly 2 years. Beginning in the second half of 2018, demand for newbuild pressure pumping equipment fell sharply, yet our order book remained strong as orders for our market-leading coil tubing equipment surged, initially in the U.S., and more recently in the international markets. During this time, we also maintained a steady stream of demand for wireline equipment, flow iron, support equipment and the control systems that differentiate our completion equipment and that will drive our success as technology advances in the completion equipment space.

The business unit is much more than a fabricator of pressure pumping equipment in the U.S. market, a fact that is reflected in our revenue mix where more than half of our sales come from international markets and more than half comes from aftermarket and consumable product sales.

Looking at the third quarter, we expect our Completion & Production Solutions segment to execute well on the highest backlog we've had since the first quarter of 2015 and deliver top line growth in the upper single-digit range. We also expect our cost-savings initiatives will push incremental margins into the mid- to upper 30% range.

Our Rig Technologies segment generated $671 million in revenue in the second quarter, an increase of $68 million or 11% sequentially. Higher volumes drove an $18 million increase in EBITDA to $74 million or 11% of sales. Increasing offshore project revenues from 2 large projects booked in Q1 and early Q2 more than offset land revenues that declined due to the completion of 2 sizable land projects and fewer land rig sales. And that result was a 14% sequential increase in capital equipment sales for the segment. Rig Technologies' capital equipment orders totaled $310 million, a sequential increase of $39 million or 14%. Bookings outpaced shipments of $284 million, providing us with a book-to-bill of 109%. The total segment backlog at quarter end was $3.17 billion.

Headlining our order book were orders for the industry's first two 20,000 psi blowout preventers. The 20k BOP stack is designed for use in extremely high-pressure deepwater reservoirs and will be an enormous technical advancement for the offshore industry as we seek to safely and efficiently drill more challenging reservoirs. Another order of note booked in Q2 was a record jacking system for an offshore wind construction vessel in Europe. NOV has played an instrumental role in the construction of wind installation vessels that have installed over 75% of offshore wind capacity in Europe. While this falls outside our traditional oil and gas markets, we've been able to leverage our core expertise in lifting and handling and in naval architecture to serve this rapidly growing industry.

In addition to the sizable niche opportunities that we've captured over the last few quarters, we continue to see healthy demand from our offshore customers for replacement equipment, for BOPs and cranes needed to equip new rigs that have been waiting for work in the shipyards and for upgrades such as crown-mounted heave compensators, multi-speed blocks and advanced automation technologies. We've also seen rapidly increasing demand for our NOVOS process automation system for the offshore markets and are scaling up our talented team of service technicians and software engineers to respond to the opportunity.

To get a sense of the speed of adoption offshore, we've installed our first system in September of 2018, and offshore systems now comprise 20 out of the 120 NOVOS packages we've sold to date. Operators and contractors are realizing the efficiency and safety benefits of our NOVOS system and are pushing to accelerate installations.

Two anecdotes serve to capture the excitement we are seeing from our customer base with respect to NOVOS: First, a drilling contractor recently informed us of their intention to have NOVOS as a standard feature on every rig in their fleet within the next few years. Second, and perhaps more importantly, one large operator is now speccing NOVOS into their tender requirements.

In our land business, North American drillers continue to slow their pace of rig upgrades. As rigs come out of service, oil and gas operating companies are taking the opportunity to high-grade their fleets, replacing older, less capable rigs with higher-grade rigs, allowing the Tier 1 AC super specs rig fleet in North America to remain well utilized, giving us confidence that upgrades will pick up once rig count stabilize.

International land rig count is on the rise and we continue to see pent-up demand for modern drilling technology. However, budgets are also tight in the international markets and tenders continue to push. We are pursuing opportunities in the Middle East, Argentina, India and in other regions, but timing for when projects will be awarded remains uncertain.

Lastly, in our aftermarket operations, we continue to benefit from our installed base of equipment around the globe. Aftermarket sales increased 9% sequentially and achieved 55% of segment revenue. Sales of spare parts continued tracking higher on steadily improving bookings. Q2 orders reached the highest levels we've seen since the first quarter of 2015, a result of increased offshore rig tendering activity and the normalization of maintenance expenditures by customers that had deferred spending through the downturn. This normalization and maintenance spending is driving meaningful improvements in our repair business. We're working on 32 offshore rigs that are undergoing recommissioning, reactivation and/or upgrades, a slight sequential improvement.

In addition to the pickup in active projects, we are also seeing a marked increase in the amount of capital equipment our customers are actively staging at our service centers. They're positioning their equipment so that we can begin work the moment they have line of sight to a customer contract. For the third quarter, we expect continued improvements in our aftermarket operations and increasing revenue from offshore projects to more than offset continued softness in our land capital equipment business, resulting in segment revenues improving between 1% and 3% with incremental margins in the 40% range.

I'd like to turn the call back over to Clay for a few additional comments before we take questions. Clay?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jose. Before we open it up for questions, I want to take the opportunity to thank our Chief Investor and Industry Relations Officer, Loren Singletary, as he transitions into a new customer-facing sales role in Wellbore Technologies. Loren has guided our Investor Relations effort for the past decade and, Loren, our investors, Jose and I all appreciate the great job that you've done here and we wish you the best in your new role. Investor Relations responsibility will be assumed by our Vice President of Corporate Development, Blake McCarthy, who will be joining us on future calls.

With that, we'll now open it up to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Byron Pope from Tudor, Pickering, Holt.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I appreciate the detailed color and commentary, as always. And Clay, I'd like to maybe take a step up and just think about the growth accelerators that you guys laid out last November. You guys have nicely laid the groundwork for those accelerators despite some of the near-term challenges in North America. And so could you just frame the progress on those as you see it and the opportunity you see for those growth accelerators, particularly as we see offshore and international activity start to trend higher?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We highlighted a number of initiatives that we've undertaken through the downturn, Byron. And what I'd point you to in our most recent result is the outperformance that we put up both in North America as well as international vis-a-vis the rig count. And I think that's -- we see sort of growing evidence of acceptance of some of the new products and technologies that we've been bringing to the marketplace. So specifically, rotary steerable systems, the SelectShift adjustable downhole motor that Jose referenced in his prepared remarks, the MWD tools that we now offer that help directional drillers geosteer these longer and longer laterals to the sweet spots of the reservoirs. We're seeing traction for all those products both in North America and in international markets. And that's to further better position NOV into one of the critical and key technologies that sort of enabled the shale revolution, directional drilling.

And so our investment there, I think, is starting to pay dividends. Likewise, our closed-loop automated drilling that we execute with a large drill pipe to help our customers improve drilling efficiency, we're getting good traction there. Right now, we're -- we'll be supporting growing levels of activity in the North Sea and other international markets with that technology in the second half of 2019, so that's contributing, keeping with the theme of pivoting towards unconventional shale technologies. On the completion side of things, continue to make headway with the new products that we have through our Completion Tools business, new products that we've introduced in well intervention and stimulation technologies group, which is part of CAPS larger, higher capacity coil tubing units, higher diameter coil tubing that can reach out further down laterals. So all of these things we have been investing in over the past 2, 3 years, quarter by quarter, we're seeing good traction and going in the right direction. That's really kind of helping our top line and I think continue to help position NOV for the future near-term headwinds notwithstanding.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And then just one quick second question, just thinking about international broadly defined, you guys had double-digit growth there, I think, last year. And just given the international growth you've seen in the first half of the year, it seems reasonable to think that -- I realize there's not any visibility on North America but it seems reasonable to think that for your international business, broadly defined that double-digit top line growth doesn't seem out of the realm of reason, is that fair?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we are pleased to see continued improvement in international markets. I'll probably pull up short on offering specific quantitative guidance on growth, but I feel like we finally have international markets and offshore markets coming back to life. And NOV is really well positioned to help support whatever our customers in those regions want to do. So glad to see it. Glad to see the stronger orders in Q2 that speak to the fact that our international offshore customers are going back to work.

--------------------------------------------------------------------------------

Byron Keith Pope, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [6]

--------------------------------------------------------------------------------

Loren, congrats. But you won't get off that easy, I'll still bug you from time to time.

--------------------------------------------------------------------------------

Loren B. Singletary, National Oilwell Varco, Inc. - Chief Investor & Industry Relations Officer [7]

--------------------------------------------------------------------------------

That's great. I look forward to it. I've always enjoyed the roundtable.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question comes from Marshall Adkins of Raymond James.

--------------------------------------------------------------------------------

James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [9]

--------------------------------------------------------------------------------

Yes, Loren, one last question for you. Could you explain how monoethylene glycol regeneration module works to us all before you leave?

--------------------------------------------------------------------------------

Loren B. Singletary, National Oilwell Varco, Inc. - Chief Investor & Industry Relations Officer [10]

--------------------------------------------------------------------------------

I'll tell you what, we'll do that in private.

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [11]

--------------------------------------------------------------------------------

He'll sell you one.

--------------------------------------------------------------------------------

Loren B. Singletary, National Oilwell Varco, Inc. - Chief Investor & Industry Relations Officer [12]

--------------------------------------------------------------------------------

I will sell you one, that's for sure.

--------------------------------------------------------------------------------

James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [13]

--------------------------------------------------------------------------------

I bet he will. Clay, the big surprise here for me, obviously, we've all been talking about the improving international market and you guys readily participate in that, but the strength you had in the U.S. when virtually everyone was guiding lower and missing numbers in the U.S. was, to me, the big surprise. So a couple of questions on that. I mean, it seems like through multiple product lines, whether it's drill pipe or Hycalog or your flow iron, or your wireline, you have a list of products that is getting a lot of aftermarket sales and other things that's holding those up in the U.S. So give us -- look out into the next 6 to 9 months, how do you see the U.S. holding up in light of those other things? And in light of the cost reductions that you've initiated here?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. As we said many times, our customers are pretty good at deferring expenditures for a while as they destock, and I think that's underway. And thanks for pointing out that we really did have a pretty good revenue quarter in the U.S. in spite of the 5% sequential decline in rig count here is because I think we have the right products and we're gaining share in a number of key products in this market. But nevertheless, we also see the U.S. operators and North American operators trying to conserve cash and slow down spending. And that means that they're destocking their supplies of some of these things.

When we hosted our Analyst Day in November, we really tried to highlight some analysis that we had put together around the physical consumption of equipment and consumables that support the level of activity. So even though the rig count's bending over a little bit, the machine is still consuming a lot of that stuff and consuming at a rate that's greater than the most recent replenishment. So that's a long way of saying that we expect this to turn around eventually as our customers destock. And again, NOV's pretty well positioned to support that.

--------------------------------------------------------------------------------

James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [15]

--------------------------------------------------------------------------------

But it sounds like your U.S. business, again, as opposed to most or everyone else, could it be flattish over -- through the rest of the year?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [16]

--------------------------------------------------------------------------------

Well, Jose guided Wellbore Technologies, where we had the greatest level of exposure, guided that down a couple of percent sequentially, and that's a mixture of U.S. and North America going down. That's partly offset by growth in -- those are the components that go into it. So I don't think we're off trend in terms of guidance, in terms of what's going to happen in the U.S. and North America through the second half of the year and would not disagree with other folks that have guided down.

--------------------------------------------------------------------------------

James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [17]

--------------------------------------------------------------------------------

Okay. All right, then last one from me, it feels like this is a meaningful inflection point in offshore and international. Everyone's been talking about it, everyone is starting to see the orders and whatnot come through. It feels like this is a multiyear sustainable deal outside of the U.S. It's going to last for a while. Is that the right feel? Is that same feeling you all have? Is that the way we should be thinking about it?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [18]

--------------------------------------------------------------------------------

I think so. And I think it speaks to the long-term view that the operators have in the offshore. These are very long-lived projects. And so our experience has been is that the offshore operators are less reactive to kind of near-term commodity prices. They've taken their time over the last 4, 5 years kind of working down costs and reengineering these projects and getting comfort around the economic viability of these things because they're multi-year, sometimes multi-decade undertakings that they're embarking on.

And given the rising level of inquiries and interest in the offshore that we hear from our drilling contractor customers, given the fact that the number of jackups, for instance, under contract picked up 14, I think, in Q2 over Q1, there's some signs out there that activity has continued -- it is starting to march upward, and our belief is that the operators that are undertaking that activity will do so with conviction and commitment and follow through. So we're very hopeful that -- this market just moves more slowly, for instance, than North America, but it's good to see it going up into the right somewhat.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question comes from Scott Gruber of Citigroup.

--------------------------------------------------------------------------------

Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [20]

--------------------------------------------------------------------------------

Jose, I had heard your comments on free cash and working capital by year-end. As we think about working capital in the context of rising percentage of international sales, and the percentage is probably likely above what most anticipate 12 months ago. Is 35% still a good target for working capital on a more normalized basis going forward? Is that how we should think about it?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. It continues to be the target that we're striving for. It doesn't mean that it doesn't require a lot of heavy lifting, which we knew that we were going to have to do during the course of the year. And as we have talked about in the prepared remarks. The rapid shift in the business to the international markets presents itself with some additional challenges. Some of those will be transitory. Those are more related to some of the inventory movements and purchases that we needed to make during the quarter, but collection times, in general, tend to be a little bit longer overseas.

But by focusing on all of the details associated with the cash conversion cycle across the organization, we're optimistic that we can make really good headway during the second half of the year. And really, if you look at the history of the organization and how our cash flow patterns tend to work, they're always more second half biased than first half. In the first half of the year, we have things that come up that require cash outflows, things such as tax payments and other benefits that come out the door. So we feel much better about what we're expecting the second half of the year.

I guess the other thing I'd point out is in addition to the challenges associated with the offshore -- sorry, international component of the working capital. We also do have more cash outflows expected in the third quarter as a result of cash severance payments that we will be making. So the cash flow is second half-weighted and I will also guide you to even more heavily weighted into the fourth quarter.

--------------------------------------------------------------------------------

Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [22]

--------------------------------------------------------------------------------

Got it. I appreciate all that color. And Clay, one for you, given the strengthening recovery abroad, I'm curious to hear an update on your efforts to arm smaller regional oil service companies with another one of the growth drivers mentioned at the Analyst Day.

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

Yes. Yes. Great question. And that's part of our strategy is providing equipment and technologies to enable smaller oilfield service companies to compete. And what I would tell you is, again, a lot of the traction that we're getting in international markets comes right out of that strategy, newer and better tools and the blossoming of a little -- more customers in some of those markets drove demand for pressure pumping equipment overseas. Not surprisingly, that was down a lot in Q2 in North America, but we saw a lot of offset in the Middle East, in South America, a few other regions around where the industry is continuing to build out kind of shale capabilities, and we're seeing investment by smaller local indigenous service companies that are becoming a bigger portion of our customer base.

--------------------------------------------------------------------------------

Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [24]

--------------------------------------------------------------------------------

Great. And Loren, congrats. It's been a real pleasure.

--------------------------------------------------------------------------------

Loren B. Singletary, National Oilwell Varco, Inc. - Chief Investor & Industry Relations Officer [25]

--------------------------------------------------------------------------------

I'm not going away. We'll stay in contact.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [27]

--------------------------------------------------------------------------------

Loren, again, congrats on the new position. I'm sure I'll be seeing you around town. Blake, you got some big shoes to fill, so good luck with that. And I guess, I'll start on CAPS here. Obviously a real nice order in your number in 2Q, that followed up a real good order number in 1Q. Given the strength in the offshore and international side, could we expect to kind of maintain this $500 million per quarter order rate in the back half of the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I'll stop short of quantifying it, Chase, but I would tell you that there are lots of other opportunities that we are tendering into. And so for instance our Process and Flow Technologies group, their pipeline of opportunities in our wellstream processing portion of that, which is where a lot of our processing equipment resides going into some of these offshore developments, their pipeline there is 50% bigger than it was this time last year. We're continuing to see lots of inquiries around FPSOs and some of our certain marine systems and offloading equipment as well. There's a lot out there.

However, I'd also point out, like our inquiries around conductor pipe connections which is an offshore product, it actually dipped down a little bit. But we had really strong orders in that business unit last year. And I think a lot of customers kind of built up their inventory on those things. But on the whole, it continues to be a more constructive picture. And I think it points to kind of steady growth in activity in the offshore.

--------------------------------------------------------------------------------

Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Okay. All right. And you've got over $1 billion of orders in the first half in CAPS. And when we think about that starting to flow through the top line and helping on absorption, you've got some costs initiatives obviously kind of running through CAPS. What's the path towards kind of the teens, low teens on the margin side? You think that it's kind of a first half of 2020? Or is it kind of later than that as we think about kind of hitting that low teens margin side for CAPS?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [30]

--------------------------------------------------------------------------------

The way I'll answer the question is more talk about sort of our expectations related to incremental margin performance. So one of the things that we're really pleased about in Q1 that was affirmed in Q2 was that the belief that our -- the offshore components of that CAPS segment had finally found bottom in Q1. We were a little nervous coming into Q2 because obviously that was somewhat contingent on the bookings that we would've -- that we would receive and as you pointed out, we had really strong bookings in the second quarter which helped support our belief that we're going to see these businesses start to recover.

So through the course of 2018 and the very first part of 2019, those offshore components were a huge drag on incremental margins. And with the offshore components bottoming out, we believe pretty strongly that going forward we will now generate incremental margins that are more consistent with what we've seen over longer stretches of time for that business which is in the realm of call it 30% to 35% plus we'll see a benefit beyond that from our cost savings initiatives. So depending on what your assumptions are related to the top line growth, you can sort of come to your own conclusion in terms of what the actual margins would be.

--------------------------------------------------------------------------------

Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Great. That's helpful. I appreciate the color. A quick follow-up. If we think about M&A and the strategy as you move forward, and obviously, the cost of capital is getting a little bit more expensive for the private equity guys, so maybe if you can kind of talk to, Clay, your M&A strategy here as we look over the medium-term?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [32]

--------------------------------------------------------------------------------

Yes. I'd be happy to. We went through an important inflection point, I think, with respect to that as we entered 2019, and basically capital is more rare and more valuable in this world than it was this time last year, let's say. So when it comes to deploying that in M&A, I think kind of recognizing the market that we're in means that we've dialed back our models a bit and become more selective and try to be more judicious with respect to capital deployment in M&A. We had a couple of small closings in the first quarter. Nothing in the second quarter.

I think we'll have some in Q3, but we're just trying to, again, be more capital efficient, get better returns on capital, in our M&A strategy and I know you're aware of this, but for everybody else's benefit, generally, our M&A strategy has been more targeted, more focused, smaller rifle-shot type of transactions and then we sought to boost the returns around these by coinvestment of product development, research, organic investment of some of the businesses and cultivation of these businesses that we brought in through our M&A strategy. So it is a little different, and I'd say as we have gotten into 2019, we sought to be just more selective and careful and judicious with our application of capital into this strategy.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

And our next question comes from Bill Herbert of Simmons.

--------------------------------------------------------------------------------

William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [34]

--------------------------------------------------------------------------------

Jose, on free cash flow, you said $300 million to $500 million in the second half of the year.

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [35]

--------------------------------------------------------------------------------

Yes. And Bill, we don't have the best connection with you, but yes, $300 million to $500 million in the second half of the year.

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [36]

--------------------------------------------------------------------------------

Mostly Q4. Q3, as Jose mentioned, we've got some severance obligations and the like, but we do expect to improve free cash flow generation through the second half of the year.

--------------------------------------------------------------------------------

William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [37]

--------------------------------------------------------------------------------

So you were clear with regard to the working capital aspirations, but beyond that, how should we think about free cash flow conversion? I mean, typically, one would think about that relative to net income, but you've got a goofy tax rate, so how should we think about your free cash flow conversion relative to that in terms of what you're targeting?

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [38]

--------------------------------------------------------------------------------

Yes. It's a fair question. We certainly do have a goofy tax rate and unfortunately, as we continue to operate at relatively low levels of income, that will continue going forward. So I think the actual cash tax requirement will be relatively modest going forward in time. So the way that I tend to think about it is more looking at EBITDA, looking at some of the other cash requirements and sort of filtering through what happens via the balance sheet, to get to that number.

--------------------------------------------------------------------------------

William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [39]

--------------------------------------------------------------------------------

Okay. And then Clay, dovetailing with your comments on M&A, historically, your capital allocation or your allocation surplus cash flow has been, if memory serves, kind of organic reinvestments, M&A, buybacks, and you've already talked about, I think, correctly that the cost of capital is increasing markedly across the board, thus you're more selective on M&A. Historically, you'd favored buybacks over dividends, in a world where the central banks are [raising to 0]. Have you guys rethought the wisdom of buybacks versus dividends in terms of your competing for investable dollars that are increasingly scarce for energy?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Bill, we've put a lot of thought and time in with our Board around our capital allocation priorities that we presented late last year. And what I would say is that we don't plan to deviate from that path. The first and foremost is, and I'm not sure this was included on your list, but defending the balance sheet is very worth it to us and so that's critical. And then supporting our ongoing operations through CapEx and then deploying capital into product development and M&A that's attractive and then excess capital into share buybacks. And since that time, our stock has moved down appreciably and we've been asked by investors about accelerating share buybacks but our plan, thus far, is to stick with our plan and do what we said, which is to achieve the leverage metrics that we talked about, and then look at deploying excess capital and share buybacks. So that's where we are on that question.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

And our next question comes from Cole Sullivan of Wells Fargo.

--------------------------------------------------------------------------------

Coleman Wayne Sullivan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [42]

--------------------------------------------------------------------------------

Loren, congrats as well from our end. On the additional cost savings you guys are targeting now, $160 million versus, I believe, the $120 million preliminary target, what are some of the adds that you guys were able to target in onto to boost that number?

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [43]

--------------------------------------------------------------------------------

As I mentioned, it's about half administrative functions and overhead and about half operations at this point so call it roughly $80 million. And there's a lot of activity in the second quarter from both our corporate functions as well as operations around putting these steps together. And importantly, Cole, they're on the heels of 4 years of cost reductions, and very, very big cost reductions. So the easier steps have been executed. So what this involves is a lot of process redesign and changes, and there are literally hundreds of specific concrete steps that we've compiled that the organization will be executing over the next 18 months-or-so to put these in place.

And I would stress as well that this work is ongoing. We're continuing to look for opportunities to reduce cost. And our plan is to update you further on our next call around those initiatives. But I'm very pleased with how people have rolled up their sleeves and kind of get the fact that in 2019, with the challenges that we face in our marketplace, we do need to become more efficient and there are different ways to do things, and that's what we're working on accomplishing.

--------------------------------------------------------------------------------

Coleman Wayne Sullivan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [44]

--------------------------------------------------------------------------------

All right. Sounds good. On NOVOS, you guys have highlighted some good traction there both in the commentary and then the press release. Is there any way to quantify the sort of equipment order opportunities associated with that pipeline growing there?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [45]

--------------------------------------------------------------------------------

It's important but difficult to quantify it, Cole, because as Jose mentioned, what's really driving this is that the oil companies are getting pretty excited about it. And a number have written applications within their own organizations that work within the NOVOS environment and they want to run those. And so this is becoming an important box to check when it comes to putting rigs to work. So I think it will pull through equipment in the future. And so in the long run, I think this is, once again, a great way to enhance NOV's product offering into the drilling space. But very difficult to quantify that absolutely right now. But very pleased with the level of market acceptance and the interest level that we see in NOVOS to improve drilling operations.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

And our next question comes from Sean Meakim of JPMorgan.

--------------------------------------------------------------------------------

Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [47]

--------------------------------------------------------------------------------

So I was hoping we could talk a little more about the segment margins. How should we look at those without the impact of the restructuring? I think you touched on CAPS a good bit, a few questions back, but wellbore margin is flat with cost savings and lower DNA, your rig tech incremental looks pretty healthy on a small revenue increase. Maybe just update us on how you're thinking about normalized incrementals from here once some of the noise in the near term shakes out?

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [48]

--------------------------------------------------------------------------------

Sure thing, Sean. So I'll sort of refer back to the Investor Day that we did last November. We provided our view in terms of both near-term and longer-term expectations related to incremental margins. And the near term was altered due to the fact that we still had some significant mixes that were shifting within our businesses. As I mentioned a little bit earlier, we've now sort of cleared that hurdle so we expect more normalized incrementals going forward and really the ranges that we gave out at that time still are what our expectations are today.

And so for wellbore, we think that sort of normalized incrementals are between 33% and 40%. CAPS, as I mentioned, is between about 30% and 35%. And rig should be more in the 25% to 30% range. And that's prior to any benefit from our cost savings initiatives. So if you look at the guidance that we provided to the Q3 -- for Q3, that guidance reflects our expectations of the contribution of cost savings into those numbers.

--------------------------------------------------------------------------------

Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [49]

--------------------------------------------------------------------------------

That clarity is very helpful. Can we also just get a little more granularity on some of the changes in working capital accounts in the quarter? There was kind of limited visibility in the release, and I appreciate the comments here, receivables were disappointing. You called that out. Were there any write downs in inventory in the quarter? Was that a clean draw? Maybe you could -- there was also a big kind of other accounts that drove the cash outflow, maybe if you could elaborate on that, it would be helpful to walk through those moving pieces.

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [50]

--------------------------------------------------------------------------------

Yes, Sean. So yes as you've pointed out, our receivables, we did have a build during the quarter and despite the fact that we had a 10% sequential increase of revenue in this environment, which you would expect to have a build in receivables, the build was more than what we would have hoped for based on the efforts that we're putting forth related to the management of working capital. Inventory was a very small use of cash. I believe it was $27 million. And as I'd mentioned previously as well, that was more than what we had expected due to the shift in the business and the need to sort of get additional materials into the company in order to be able to execute on the significant levels of bookings that we had in Q2.

Specifically, you ask the question about the charges and kind of what happened as it relates to inventory, we did have roughly a $300 million charge or write down related to inventory during the quarter. And so that's why you'll see that the movements on the balance sheet won't reconcile perfectly with what you see on the cash flow statement. But obviously, as we're going through and restructuring operations, we've taken a very hard look at the entire asset base of the company.

--------------------------------------------------------------------------------

Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [51]

--------------------------------------------------------------------------------

Got it. Anything else in terms of moving parts in cash from operations to call out? Or that should get us where we need to be?

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [52]

--------------------------------------------------------------------------------

I think those are the main components. We think we'll see improvements. We need to see improvement on all fronts going forward.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

And our next question comes from Marc Bianchi of Cowen.

--------------------------------------------------------------------------------

Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [54]

--------------------------------------------------------------------------------

I wanted to ask a little bit on the cost-cutting to start moving the target up to $160 million. You guys took about $400 million restructuring charge this quarter, so I'm just wondering if we could kind of bridge the total restructuring which seems like a pretty big number with the cost-cutting only to $160 million. Is there potential more upside? And when can we be kind of made aware of that?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [55]

--------------------------------------------------------------------------------

There are, Marc, but as Jose has just mentioned, the charge includes, for instance, the $291 million inventory charge. So that's not included in the kind of the EBITDA pickup that we referenced. The $160 million in cost savings is ongoing. Structural changes to our cost structure around administrative functions and operational functions to run more efficiently whereas the charge was partly inventory, partly PP&E and kind of a different animal. But also within the charge our specific charges around our voluntary early retirement program and severance as well.

--------------------------------------------------------------------------------

Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [56]

--------------------------------------------------------------------------------

Okay. Okay. That makes sense. And then in terms of CapEx, just trying to do a little bit of the math here for the back half that you're talking about. I think we were targeting about $350 million of CapEx for 2019 and you did about $100 million in the first half. So just wondering if you're still planning on doing the $350 million for the year, and then kind of what the thought is as we head into 2020 on that line?

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [57]

--------------------------------------------------------------------------------

Yes, Marc. We think we'll come in underneath that $350 million budget that we had set for the year and we should just be a bit north of $300 million.

--------------------------------------------------------------------------------

Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [58]

--------------------------------------------------------------------------------

Okay. Any comment on 2020, Jose?

--------------------------------------------------------------------------------

Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [59]

--------------------------------------------------------------------------------

Not at this point. So I think you'll find we'll continue to sort of have CapEx as a percent of revenue between the 3% to 4% range.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Clay Williams for any closing remarks.

--------------------------------------------------------------------------------

Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [61]

--------------------------------------------------------------------------------

Thank you all for joining us this morning and we look forward to sharing with you our third quarter results when we host the call in October.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.