NOV - Q1 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the NOV first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Amie D'Ambrosio, Director of Investor Relations. Ma'am, please go ahead.

Amie D'Ambrosio (Director of Investor Relations)

Welcome, everyone, to NOV's first quarter 2024 earnings conference call. With me today are Clay Williams, our Chairman, President, and CEO, and Jose Bayardo, our Senior Vice President and CFO.

Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year.

For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q, filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release, available on our website.

On a U.S. GAAP basis, for the first quarter of 2024, NOV reported revenues of $2.16 billion and a net income of $119 million, or $0.30 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term Adjusted EBITDA, as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Clay Williams (Chairman, President and CEO)

Thank you, Amie. For the first quarter of 2024, NOV generated revenue of $2.16 billion, an increase of 10% compared to the first quarter of 2023. The company generated fully diluted earnings of $0.30 per share for the first quarter, down $0.02 compared to the prior year first quarter.

Pre-tax profit increased 14% year-over-year, but a higher effective tax rate and lower income from our Voestalpine joint venture in the first quarter led to lower earnings per share year-over-year. Adjusted EBITDA was $241 million, or 11.2% of revenue, a $46 million increase from the first quarter of 2023, representing 24% leverage year-over-year.

NOV's first quarter EBITDA and EBITDA margin were its highest in nine years, and overall, it was a solid start to 2024. We began the year with several new business leaders across our organization and began operating under two new segments: Energy Products and Services and Energy Equipment. Revenue from Energy Products and Services grew 8% compared to the pro forma first quarter of 2023, despite lower global rig count year-over-year.

The segment continued to realize good adoption of its portfolio of technologies and a rising demand for the tools and consumables it manufactures, particularly in the international and offshore markets. Year-over-year, top-line growth was broad-based as all but one of its businesses posted increased sales, with Completion, Drill Pipe, and Rig Instrumentation, in particular, posting strong double-digit gains.

Our new Energy Equipment segment revenues grew even more, up 12% year-over-year on a pro forma basis. Rising offshore activity fueled demand for equipment tied to deep water developments, FPSOs, and drilling rig reactivations and recertifications, which enabled the segment to overcome lower sales of pressure pumping equipment to North America year-over-year.

As part of our new structure, we are reporting a March 31st, 2024 backlog for Energy Equipment segment of $3.96 billion, which is comprised of NOV's contracted longer cycle manufacturing and project work. Backlog declined 5% through the quarter, as bookings of $390 million represented a book-to-bill of 77%. We nevertheless see strong demand and have started the second quarter off with some big wins.

While we won a $250 million+ order for Energy Equipment for offshore work in Latin America during the first quarter, it required technical clarification, delayed signing of the contract until April. Capital equipment orders are typically lumpy, but we feel confident in the outlook and strength of the market. Solid and stable commodity prices and exploration successes in new basins provide a foundation for growing offshore activity.

A foundation which is expected to drive offshore FIDs over $100 billion per year for the next few years, and a 50%+ uplift in FPSOs ordered in the next five years compared to the previous five, in spite of Saudi Arabia trimming or postponing its maximum sustainable capacity ambitions in the offshore.

We are also optimistic about onshore international developments, particularly in the Middle East, where dozens of rigs are being tendered and a couple of national oil companies are pursuing unconventional developments in earnest. Our optimism and confidence continue to grow.

That's why last night we announced a significant expansion of our return of capital program, including our plan to increase our base dividend by 50% and a $1 billion share repurchase authorization. Jose will go into more details of the program in a few minutes.

Our investments over the past several years in new digital edge compute, optimization fueled by artificial intelligence, mechanization and automation, software control systems and remote monitoring, equipment electrification, emissions reductions, drill cuttings processing, artificial lift, and downhole drilling technologies are leading to new promising customer conversations and a growing number of users of these new products.

Together with the recovery of oil field activity in key offshore and international markets, new NOV products and businesses underpin our buoyant outlook for the next decade and our plan to substantially ramp our return of capital to our shareholders. After a challenging few years, we expect to continue to improve our profitability to drive EBITDA margins into the 14%-15% range as we exit 2024, and to generate more cash as working capital moves past first quarter seasonality and normalizes through the remainder of the year.

Continued cost reductions are an important part of our plan, too, and our new segment structure is facilitating additional efficiency improvements as we consolidate more manufacturing locations, centralize certain supply chain functions, engage engineering talent more collaboratively, and benefit from greater marketing coordination across business units and segments.

We expect the $75 million cost reduction initiative we announced last July to continue to roll out through the remainder of the year, having achieved about 30% so far and expecting it to accelerate during the second quarter.

Strategically, through the last decade, NOV has reinvented itself with new products and technologies that I mentioned earlier, recognizing that organic innovation, occasionally supplemented by a targeted acquisition here or there, was the most capital-efficient way to reposition our franchise to meet the evolving needs of the oil field.

The two acquisitions we closed during the first quarter are good examples of this approach. Notably, these acquisitions were made at multiples well below the multiple of our second quarter sale of our Pole Products business and below multiples where NOV trades, in effect, reallocating capital across our portfolio to improve profitability and returns.

During the first quarter, we acquired Hellenes, which brings us the technology underlying our iNOVaTHERM cuttings processing unit. This technology works in concert with dryers and centrifuge technologies we've developed internally to process drill cuttings for safe environmental disposal.

We've deployed edge compute and condition-based monitoring to optimize this on-site process, which dramatically lowers greenhouse gas emissions for offshore operators who are expressing high demand. We expect our fleet of units on rent to grow from four in the first quarter to seven by the end of the second quarter.

Our acquisition of the Extract electric submersible pump business brings an opportunity to deploy our organically developed MaxEdge computing platform to artificial lift and production optimization.

As operators extend their well profiles from 2mi laterals to 3mi laterals, their initial gross volumes produced through each individual wellhead will increase significantly, too, a market trend that we expect to provide additional tailwinds to ESP demand. It also complements our existing artificial lift, choke, separation, pumping, and processing products, and we believe we can leverage NOV's scale and footprint to grow this business.

We're delighted that these two strong businesses are now part of the NOV family and should benefit from complementary technologies developed organically within NOV. The MaxEdge platform also provides the foundation for other new products as well, like Max Completions, which has been adopted by dozens of companies and thousands of individual users.

In fact, revenues from the Max family of products increased 35% sequentially and 2.5-fold from the first quarter of last year. Other new technology developments range from new products like our PosiTrack torsional vibration mitigation tool to our ATOM RTX rig robotics system and our downhole broadband solutions, to our investments in startups like Keystone Tower Systems, where we aim to revolutionize onshore wind tower construction.

Innovation takes time and, frankly, startup costs, which vary across these initiatives. Nevertheless, our success and innovation are what will continue to differentiate our business and drive improved profitability over the next several years. We expect improving margins in our backlog to contribute to higher profitability as well, particularly in 2025 and beyond, as lower-margin frame agreements signed during the pandemic lows expire.

For instance, one of our Energy Equipment business units foresees a roughly 800 basis point improvement in margins from 2024-2025 due to its steady high gradient of contracts with improved inflation risk protection.

We have been systematically working towards higher-margin, lower-risk contracts, walking away from opportunities where we see insufficient margins or too much risk. The key to success for NOV is to demonstrate value as it always has been. Our new technologies do that, and our customers' programs and developments are evolving to benefit even more from this value.

That's what's changing. International and offshore operators are going back to work, and they want operational efficiencies obtainable with new NOV technologies. They want to reduce their environmental impact. They want to drive better safety. We can help. Consolidation in North America is being led by operators who value technology and are focused on continuous improvement. Again, we can help.

Competitive pricing dynamics and inflation continue to be a headwind for margin improvement, but as our technologies roll out day by day, customer by customer, our value proposition becomes clearer, and that's a great place to reset pricing discussions.

Before I hand it over to Jose, I want to say thank you to all our employees listening today. NOV continues to transform this industry in so many ways, and that is directly due to your ingenuity and your hard work. We appreciate you. Jose?

Jose Bayardo (SVP and CFO)

Thank you, Clay. NOV's EBITDA increased 24% year-over-year to $241 million, with margins improving 131 basis points to 11.2% of sales. Cash flow used by operations was $78 million during the first quarter, driven primarily by seasonal builds in working capital and annual payments made in the first quarter.

Working capital increased $395 million sequentially, due primarily to the decrease in accrued liabilities associated with the annual payments made during the first quarter and the two acquisitions we completed, which accounted for $106 million of the $127 million increase in inventory.

While operations consumed cash, the use was well below what we consumed in the first quarters of the last two years, which reflects the turn in our business that gives us confidence in our ability to generate a substantial amount of cash flow over the next several years. We believe NOV is well-positioned to deliver strong performance as the cycle matures from a nascent recovery and evolves into an environment where later cycle equipment and technology businesses will outperform.

As Clay noted, an improved market environment, differentiated technologies that we've developed over the last several years, and our focus on operational efficiencies will continue to push margins and cash flow throughout 2024 and beyond. Our base forecast contemplates a sustainable multi-year period with modestly improving industry activity, led by the international and offshore markets.

We expect soft activity in the U.S. through 2024, but anticipate a recovery in 2025, aided by increasing gas exports. However, we expect improvements in oil-directed activity in the U.S. to be modest, with international and offshore activity providing most of the incremental supplies required to fuel the growth of the world's economies.

As a result, we expect a little less volatility in NOC and IOC drilling activity over the next several years versus what we have seen from North American independents over the past decade. Against this backdrop, we anticipate generating high levels of free cash flow on an annual basis for each of the next several years.

I want to stress the word annual when I talk about free cash flow, because of the seasonality we experience during each year, and the fact that we view our capital allocation activities on an annual, multi-year basis.

Our priorities for capital allocation remain consistent. One, defend the balance sheet. Two, maintain our asset base. Three, invest in organic growth opportunities that drive superior risk-adjusted returns. Four, pursue M&A that accelerates strategic growth initiatives at attractive returns and five, return capital to our shareholders.

Our balance sheet is currently in solid shape, with gross debt to EBITDA below our target level of two to one. We intend to continue to use a portion of our free cash flow to return our net debt to EBITDA ratio below 1x. We have appropriately invested in our assets and expect a base level of investment to maintain and modernize our existing asset base over time of between $200 million and $250 million per year.

Incremental to this base level of spend are attractive organic investment opportunities, primarily related to the commercialization of many of the technologies we deployed over the last several years, which could range from $50-$150 million per year. All this is consistent with our expected $330 million capital expenditure plan for 2024.

We will continue to look for compellingly valued strategic acquisitions that can accelerate our growth initiatives. We anticipate we will complete occasional small bolt-on transactions, similar to what we've done over the last several years. While the likelihood of larger acquisitions remains low, we intend to maintain the flexibility to pursue such a transaction.

With a healthy balance sheet, well-maintained asset base, the expectation of smaller rifle shot acquisitions, and a high level of confidence in our outlook, where NOV's capital-light business model will generate substantial amounts of free cash flow, we're ready to increase the return of capital to our shareholders.

Last night, we announced a plan to return at least 50% of our excess free cash flow, defined as cash flow from operations, less capital expenditures and other investments to our shareholders going forward. To balance the interests of all NOV stakeholders, our framework utilizes a steady base dividend, opportunistic stock buybacks, and a supplemental dividend to true up returns to our shareholders on an annual basis.

Specifically, we intend to return this capital through a combination of the following: One, we expect to increase our quarterly dividend from $0.05-$0.075 per share, a 50% increase, beginning in the second quarter of 2024, resulting in an annual dividend payment of roughly $118 million going forward.

We believe base dividends provide an immediate, direct benefit to all shareholders. Two, we plan to opportunistically repurchase shares under our new $1 billion 36-month share repurchase authorization. With our share price trading below what we consider a fair value, we believe using some of our excess free cash flow to repurchase our shares will drive long-term value.

Three, at the end of each year, we plan to utilize a supplemental dividend that would be payable in May, starting in 2025, to coincide with our annual shareholders meeting, to true up our total annual return of capital to at least 50% of our excess free cash flow generated during the preceding calendar year.

We believe this approach serves and balances the interests of all of our shareholders. We will not compromise the health of our balance sheet or our ability to invest in the business. Having experienced several routine industry cycles and one recent and very severe pandemic-induced cycle, we understand our business can change in a hurry.

However, our capital return framework reflects our confidence in NOV's outlook and our commitment to delivering superior returns to our shareholders. Finally, acknowledging that none of us can control or accurately predict the future, I want to try to frame what we think is possible over the next four years associated with our base industry outlook.

Assuming continued operational and financial execution, what we believe is a reasonable EBITDA growth profile, and sticking to the minimum level of returns at 50% excess free cash flow, we estimate the aggregate capital to return to shareholders through 2027 could be in the range of $1.5 billion.

Under this scenario, approximately 30% or $470 million of shareholder return would be provided through our base dividend, and the remaining $1.03 billion would be split between share buybacks and supplemental dividends. I'll now move on to segment results.

Our new Energy Products and Services segment generated revenue of $1.017 billion in the first quarter, an 8% increase compared to the first quarter of 2023. EBITDA increased $20 million-$174 million, or 17.1% of sales, representing flow-through of 26% compared to the first quarter of 2023.

Revenues for the segment are comprised of service and rentals, sales of consumable products, and sales from generally shorter-lived or consumable capital assets, such Drill Pipe, composite products, conductor pipe, and solids control equipment, that tend to see demand rise and fall more or less with activity.

Sales mix for the segment during the first quarter was as follows: service and rental, 49%, product sales, 20%, and capital equipment sales, 31%. As noted, the largest share of our Energy Products and Services segment's revenues come from service and rentals, including rentals of our technologically advanced downhole tools and drill bits, coatings and inspection services, solids control services, and drilling data acquisition, analytics, and optimization services.

With the exception of coating and inspection services, which tend to somewhat move with demand for Drill Pipe and other tubular goods, the remainder of our service and rental revenues tend to move in line with industry activity, ±, usually plus, changes in market share.

First quarter revenue for the segment service and repair revenues increased in the low to mid-single digits sequentially and year-over-year, with growing demand from offshore and international markets, particularly the Middle East, more than offsetting lower activity in North America.

Product sales are the segment's second category of revenues and are derived from sales of drill bits, Completion Tools, composite sleeves and liners, artificial lift products, shaker screens, and downhole tools, among others. Note that several of these products, such as drill bits and downhole tools, are also rental items, which I will cover in a moment.

Product sales tend to be less volatile, less seasonal, and track activity a little more closely than revenue from capital equipment, although sales of products can also lag activity increases as our customers frequently stock inventories of these products.

While individual sales are typically small and infrequent, each operation can have occasional, individually large shipments that may be requested by certain large NOCs, who sometimes take bulk shipments 1x or 2x per year.

The segment has steadily increased product sales every quarter over the last year, with the first quarter of 2024 up 8% sequentially and 19% year-over-year. We expect product sales to increase in the mid- to upper-single digits again in the second quarter. Looking at specific product lines, drill bits are capitalizing on increasing activity in the Middle East and offshore markets.

Our Completion Tools business is also realizing solid levels of demand in the Middle East, more than offsetting softness in North America. Sales of our Tuboscope Thru-Kote sleeves, Zap-Lok connections, and Tector thread protectors have remained solid, and we expect to see a significant increase in the second quarter from shipments to customers in the Middle East, West Africa, and Latin America.

Sales of our downhole tools decreased 20% sequentially after large shipments to Asia and Europe in the fourth quarter did not repeat. Finally, sales of the segment's capital equipment offerings, which include Drill Pipe, conductor pipe, fiberglass products, Managed Pressure Drilling Equipment, shale shakers, and other equipment, tend to be seasonal and volatile, often lagging activity a bit.

In the first quarter of 2024, revenues from capital equipment in our Energy Products and Services segment increased 8% year-over-year, but declined 23% sequentially due to the seasonal effect of customers making a big push to receive their equipment at year-end. Our Drill Pipe business unit experienced a greater than average seasonal decline, given outsized fourth quarter shipments to international markets, partially offset by increased U.S. land deliveries.

New orders, however, had a more favorable international and offshore weighting and included an award for an offshore completion and workover riser destined for offshore Brazil. Capital equipment sales for our solids controls offerings were down in the mid-20% range sequentially due to the ordinary increase in year-end shipments.

Revenues increased in the upper teens% range year-over-year on growing adoption of our Alpha shaker and sales of other innovative drilling solutions, such as our TundraMax mud chilling systems.

Our two most seasonally volatile capital equipment offerings are our conductor pipe and our Managed Pressure Drilling equipment. After a strong fourth quarter for the two product lines, both realized substantial sequential revenue drops, and yet both also have very strong outlooks resulting from the increase in offshore activity.

Conductor pipe casing orders achieved a book-to-bill of over 200%, with solid demand coming from projects in the North Sea, West Africa, Gulf of Mexico, and South America, which will allow for a much improved second quarter. We're expecting revenues from both conductor pipe and MPD to more than double from the first quarter to the second quarter of 2024.

Our composite product offerings tend to be our least volatile capital equipment line in the segment, due in part to the diverse set of end markets served, which include midstream, oil and gas, fuel handling, chemical, industrial, and marine. Demand for composite products is still seasonal, and sales declined in the low single-digit range sequentially, but are up mid-single digits year-over-year.

Outlook for all end markets remains solid, with particularly robust demand for oil and gas products in the Middle East and a recent pickup for orders for flexible pipe and composite tanks in the Permian. For the second quarter, we expect revenues for our Energy Products and Services segment to improve between 1% and 5% from the second quarter of 2023, with EBITDA in the range of $180 million-$190 million.

Our Energy Equipment segment, which is comprised of our longer cycle, capital equipment-oriented businesses, generated revenues of $1.178 billion in the first quarter, a 12% increase compared to the first quarter of 2023. EBITDA was $119 million, or 10.1% of sales, up 27% compared to the first quarter of 2023.

Clay covered our bookings for the quarter, but I want to emphasize that capital equipment business is inherently more volatile than other businesses. In this case, despite orders that slipped from the first to second quarter, we foresee a generally bright outlook and now expect an outsized order book in the second quarter.

As a pure capital equipment business, our operations have two revenue streams: capital equipment sales and aftermarket sales and services. During the first quarter, equipment sales, which includes both revenue out of backlog, as well as quicker turning equipment sales that do not meet our criteria to qualify as backlog, accounted for 52% of the segment's revenues.

Aftermarket sales and service accounted for the remaining 48%. Similar to what we experience in our Energy Products and Services segment, sales and orders for capital equipment tend to be more volatile and are much more affected by seasonality than aftermarket sales.

The segment's capital equipment sales were up 7% year-over-year, but had a seasonal decline from the fourth quarter of 16% due to the typical year-end push by customers to take deliveries. Aftermarket revenues tend to have a little less seasonality and are much less volatile.

Aftermarket revenue improved 18% since the first quarter of 2023, and was off approximately 1% from the fourth quarter. The vast majority of our aftermarket revenue comes from our Drilling Equipment and intervention and stimulation businesses.

Our Drilling Equipment business generates 3/4 of its revenues from aftermarket sales and services, and in the first quarter, its aftermarket revenues improved 27% year-over-year as the business continued to improve throughput and capitalize on a very healthy level of reactivation and recertification projects and spare part orders.

High levels of activity around the world are increasing the number of NOV-equipped rigs turning to the right, requiring more demand for NOV's parts and services. Additionally, as we dig deeper into the stack for reactivations and the average age of the operating fleet increases, reactivations, recertifications, and upgrades become more complex.

During the first quarter of 2024, we saw the total value of projects in execution having a value of greater than $2 million continue its steady rise, now up 175% from the first quarter of 2023, and reaching an average size of $20 million per project, up from a $9 million average in the first quarter of 2023.

With robust offshore operator drilling plans and current day rates allowing drilling contractors to generate significant cash, but not high enough to justify new builds, contractors have incentive to keep their aging assets in good working condition.

Being the OEM with the largest installed base, our Rig Technologies aftermarket business will continue to play a larger role for our customers who rely on NOV to provide reliable service and quality for these critical assets.

Our Intervention and Stimulation Equipment business unit's relatively stable aftermarket revenues reached 63% of the unit's mix in the first quarter of 2024. Despite a soft North American market, we expect our aftermarket operations to remain busy, providing consumables and replacement components, as well as upgrades and refurbishments of equipment, both domestically and overseas.

Moving to the capital equipment side of the business, our Drilling Equipment's capital sales improved in the mid-20% range year-over-year. Book-to-bill was well north of 100%, led by a 20,000 PSI BOP upgrade for a drill ship in deepwater Gulf of Mexico. This will be the industry's fourth 20,000 PSI BOP, with NOV building all four systems and demonstrating our leadership in cutting-edge pressure control technology that allows our customers to reach previously inaccessible reservoirs.

Utilization for offshore rigs remains high and increased toward the end of the first quarter. The news from the Saudis scaling back their offshore fleet will put some pressure on jack-up utilization near term, but we believe those rigs will eventually be absorbed by other projects around the world and will drive more activity into onshore unconventional gas fields.

This will increase demand for our land rig equipment and aftermarket support, which we are very well positioned to provide in Saudi, as well as for our Intervention and Stimulation Equipment business, which has already seen an increase in orders for completion and intervention equipment as a result of rapidly improving activity in the Ghawar unconventional field.

Sticking with our Intervention and Stimulation Equipment business, capital equipment deliveries were down in the 20% range from the first quarter of 2023, due primarily to strong deliveries of eFrac and conventional pressure pumping equipment in early 2023 that did not repeat.

Capital equipment orders declined due to lower demand for new pressure pumping kit, but the unit still posted a book-to-bill greater than one as a result of solid demand for equipment destined for international markets, including the order for Saudi that I just mentioned.

While we anticipate bookings for new pressure pumping equipment will remain soft in the second quarter, there continues to be a high level of interest for alternative Energy Equipment, specifically eFrac and CNG units, and the business's backlog remains healthy, with meaningful shipments of DGB and eFrac units slated for the second quarter.

In international markets, the business is seeing solid demand from Africa and Europe, in addition to strong demand from the Middle East. Our Offshore Wind and Construction business achieved year-over-year revenue growth in the mid-20% range from strong execution on the unit's backlog of offshore wind projects. Bookings include an inter-array cable lay vessel for a Japanese construction company, which will be used to connect wind turbines within an offshore development.

Outlook for the unit's core markets is positive, with improving sentiment in the offshore wind space and the potential for a couple new wind installation orders later this year. Wellstream Processing operations achieved solid year-over-year revenue growth from strong execution on the operations backlog of processing equipment projects, which continues to grow with increasing opportunities to support new FPSOs.

The operation also continues to realize more opportunities to leverage its gas and fluids processing expertise into large-scale energy transition projects, and received an order for a hydrogen dehydration and deoxygenation package in Australia after having completed an engineering study for the customer over the last year.

Our Production and Midstream business saw an upper single-digit decline in revenue compared to the first quarter of 2023. Challenging conditions in North America gas markets impacted demand for chokes and other equipment, but was partially offset by strong international activity, particularly in the Middle East.

Bookings remained robust, driven by choke orders in the Middle East, where demand over the last five months exceeded orders for the preceding 11 months. With units quickly improving backlog and ramping deliveries, we expect solid growth from this operation in the second quarter.

Notwithstanding the low level of bookings in the first quarter, our Subsea Flexible Pipe business unit posted solid results, and its mid- to longer-term outlook is very strong. The unit posted mid-teens year-over-year revenue growth, and despite the large order slipping out of the quarter, the business secured a contract to deliver its first actively heated flexible pipe system for a deepwater gas field development in the Black Sea.

The pipeline of future tenders for Subsea Flexible Pipe is robust, with considerably improved pricing. We expect lower margin contracts to continue to be replaced by higher margin projects, which will drive a significant improvement in margins during 2025.

For the second quarter, we expect revenues for our Energy Equipment segment to improve between 1% and 5% from the second quarter of 2023, with EBITDA in the range of $135 million-$145 million. With that, we'll now open the call to questions.

Operator (participant)

Thank you, Jose. Ladies and gentlemen, if you have a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

We ask that you please limit yourself to one question and one follow-up. One moment while we compile our Q&A roster. Our first question is going to come from the line of Jim Rollyson with Raymond James. Your line is open. Please go ahead.

Jim Rollyson (Director and Equity Research Analyst)

Good morning, Clay and Jose. Nice-

Jose Bayardo (SVP and CFO)

Morning, Jim.

Jim Rollyson (Director and Equity Research Analyst)

quarter, first of all.

Jose Bayardo (SVP and CFO)

Thank you.

Jim Rollyson (Director and Equity Research Analyst)

Jose, you talked about free cash flow again and kind of the outlook over the next handful of years. You obviously got the negative quarter out of the way for the year seasonally, but is that— in the past, you have talked about this kind of EBITDA to free cash flow conversion rate in the +50% range, and as you think about just... I want to update that for 2024, but as you think about how that transcends over this 2024-2027 time frame that you kind of laid out, is that still the right range of conversion rate to use?

Jose Bayardo (SVP and CFO)

Yeah. Thanks for the question, Jim. First of all, yeah, as it relates to 2024, we continue to expect that we'll convert at least 50% of our EBITDA to free cash flow during the year, and if anything, we're growing more confident about our ability to achieve, if not exceed, that.

Then, really, I think the bulk of your question is related to the out years. Obviously, not ready to provide explicit guidance, but did provide kind of a little bit of information related to that from the standpoint of our return on capital program and plan.

Bottom line is, you know, as we so look forward in time with sort of the base case scenario that I laid out, where we expect a slightly less volatile environment than we've been in over the past decade, and steady, gradual, improving activity levels, there's no reason why we shouldn't be able to maintain that level of free cash flow as a percentage of our EBITDA.

Jim Rollyson (Director and Equity Research Analyst)

Gotcha. That's just helpful for, you know, modeling and how to think about this and that takes me just glad to see the framework for the capital return program. I think a quarter earlier than you guys had promised, so even better.

But as we look at, you mentioned from the share repurchase program of $1 billion, that that's going to be opportunistically driven. Maybe how you think about or how the board thinks about, you know, where to allocate capital to that part of the equation versus your kind of supplemental catch up at year-end. Like, what drives the decision to move capital between those two means of returning capital to shareholders?

Jose Bayardo (SVP and CFO)

Yeah. As you pointed out, the program is intended to be opportunistic. As I also mentioned in the prepared commentary, we're really viewing our return on capital plan and frankly, just the way that we look at cash flow across the board on an annual and then a multiyear basis.

So what we wanted to do was provide a very clear framework and assure our investors that every year we will return at least 50% of our excess free cash flow. So we intend to be opportunistic. We intend to, as we mentioned, increase the base dividend and then opportunistically buy back shares throughout the course of the year.

Then, depending on as to whether or not we're able to return the entire 50%+ of excess free cash flow during the course of the year or not, we would have the supplemental dividend early the following year to true up that return of capital to our shareholders.

You know, some of the other variable that goes into the definition of excess free cash flow is sort of what we're seeing from an acquisition standpoint. There could be times, such as right now, where there are a couple of small acquisitions that we've sort of factored into what we expect to be our excess free cash flow during the course of the year.

Acquisitions are never done until they're done, and so if they don't materialize, if they don't transact, they don't close, we'll have extra capital at the end of the year that we would certainly need to return via that supplemental dividend. So hopefully that helps frame how we're thinking about things.

Jim Rollyson (Director and Equity Research Analyst)

That does. I appreciate the call, color, guys. Thank you.

Jose Bayardo (SVP and CFO)

You bet. Thanks, Jim.

Operator (participant)

Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Stephen Gengaro with Stifel. Your line is open, please.

Stephen Gengaro (Managing Director)

Thanks. Good morning, everybody.

Jose Bayardo (SVP and CFO)

Hi, Stephen.

Stephen Gengaro (Managing Director)

I think the first question for me is, when you think about the announcement of the return of capital framework, what's changed over the last couple months that gives you the confidence to put it in place?

I mean, Jose, you talked a little bit about kind of the visibility on free cash, but it did come earlier than we expected. I'm just kind of curious, what sort of drove the decision to announce this today as opposed to after maybe seeing more progress on free cash generation?

Clay Williams (Chairman, President and CEO)

Can I, before Jose answers, can I just say, Stephen, frankly, putting 2023 in a rearview mirror, was a big plus for us. We've been very frustrated here with our supply chain disruptions and lack of free cash flow, and got Q1 behind us, and, and that-

I think that really, looking forward, we, we think our, our shareholders need to know how we're thinking about return to capital and we said, you know, 90 days, earlier than we had indicated, before, would be better off for all parties.

Jose Bayardo (SVP and CFO)

Yeah, and I think Clay summed it up pretty well. I think the only other thing that I would really add to that is that, obviously, we got through the typical ordinary course burn of cash from an operating cash flow and free cash flow standpoint in Q1, which is, you know, a big milestone that we wanted to get through. Also, during the quarter, we had the $243 million that we spent on acquisitions.

One of the items that allowed us to really gain additional level of confidence, in addition to just from what we're seeing from an operating environment going forward, is the fact that we were able to close the divestiture early in Q2 to replenish our cash balance and really allow us to go ahead and start moving forward with the return of capital program.

So feeling great about things from an operational standpoint, feeling great about the balance sheet and where we sit, and feeling good about where the stock price is, that it will be a good accretive value proposition for our shareholders to buy back shares at this point in time.

Stephen Gengaro (Managing Director)

Great. No, thank you. That's, that's helpful. Then just one follow-up on the free cash side. We've talked historically about kind of working capital as a percentage of revenue and kind of where that has been historically versus in 2023. How should we think about that unfolding over the next year or two?

Jose Bayardo (SVP and CFO)

Yeah, good question, Stephen. So I think last quarter, I mentioned that at the end of this year, we expected that working capital as a percentage of our revenue run rate to see some modest improvement, basically 100-200 basis points.

Now, that's changed a little bit here with the completion of the recent acquisitions, which had a, you know, the acquisition had a very high load of working capital. As I pointed out in my prepared remarks, the bulk of the increase in the inventory that we saw from Q4 to Q1 was a result of the acquisition, and we actually view that as a positive.

We think that, you know, they, they, like every other manufacturer, had had challenges from a supply chain standpoint and built up some inventory to, to work through those challenges. I think we'll be the beneficiary of that as we sort of normalize inventory levels, over the coming months and quarters.

Not quite prepared to sort of give you a 10-point answer as to what the new metric will be at the end of 2024. We've only had this under our belts for a couple of months now. But needless to say, we're more optimistic about converting, working capital to cash during 2024 than we were a quarter ago as a result of this, this item.

Stephen Gengaro (Managing Director)

Great. Thank you for the color.

Clay Williams (Chairman, President and CEO)

Yeah, thanks, Stephen.

Operator (participant)

Thank you, and one moment as we move on to our next question. Our next question is gonna come from the line of James West with Evercore. Your line is open. Please go ahead.

James West (Senior Managing Director)

Hey, good morning, Clay, Jose.

Clay Williams (Chairman, President and CEO)

Good morning, James.

Jose Bayardo (SVP and CFO)

Good morning, James.

James West (Senior Managing Director)

So, I'd love to hear both of your perspectives actually on, on, on this. Given that we've got, you know, an enormous number of offshore rigs that are gonna turn to the right or are turning to the right now, and, and will be turning to the right as we go through this year and next year for pretty, you know, long-term contracts and duration is extending, you know, we're gonna need obviously, spare parts, but we're gonna need a lot of offshore just equipment to be built, whether it's, you know, platforms and TLPs, spars, all the kind of stuff that you guys do.

So how are you thinking about the visibility? Secondarily, what kind of innovations, because you guys are constantly innovating these, these, these products as equipment, are you introducing to the market to make them, you know, more efficient, to decarbonize the operations, et cetera, as we see this, you know, long-duration cycle, play out here offshore?

Clay Williams (Chairman, President and CEO)

Great question, James, and we appreciate you pointing out the fact that NOV's been a major innovator in the offshore market. You, more than anybody, know that the outlook for the offshore is very, very bright.

There are lots of discoveries and developments and things going on in multiple basins including some new exploration basins that have emerged in the past few years, with discoveries in Namibia and Guyana and Suriname, and places like that, that are fueling all that demand.

That's giving rise to a pretty bright outlook for FIDs around those projects, and much higher level of offshore activity, which has been, you know, pretty much lacking through the last decade. So just to recount how we participate in that, yes, we do support the bulk of the world's offshore drilling fleet, because we built most of those rigs and there is rising demand for aftermarket support of those.

We're reactivating a number now. Jose went through some statistics on that. Also pointed out the strong results in aftermarket in our rig business there and we're well known for that. Those rigs need Drill Pipe, they need spare parts, they need solids control services, they need bits, they need downhole tools, hole openers, all of which NOV provides.

Then on the production side, I think we're probably less well known for what we do there, but through the past 10-15 years, we've added a lot to what we sell into FPSOs. So, the outlook for floating production storage and offloading vessels, FPSOs, is similarly bright in the deepwater basins.

I think a disproportionate level of offshore activity is gonna be focused on the deepwater, which will drive demand for FPSOs and there's some industry forecasts out there that have them in the range of 50-60 vessels needed over the next five years, a significant increase over the preceding five years.

There we provide everything from hole designs and cranes to fire water piping systems and ballast piping systems, to gas processing and dehydration, to chokes, to separators, to turret mooring systems, to spread mooring systems, to flexible pipe that's used to connect those vessels to the wellheads on the sea floor.

If you add all that up, it can range anywhere from $100 million per vessel for NOV's kit, all the way up to as much as $700 million per vessel for NOV's kit. So that's another area where NOV can participate.

With respect to innovation and kind of the next generation of drilling, everything wired Drill Pipe, high speed data connections to the bottom of the hole, to artificial intelligence that's making meaningful impacts on drilling optimization through our Kaizen offering to rig automation, which now a couple of large IOCs are using our new ATOM RTX robotics on offshore rigs in Brazil.

We have an offshore drilling contractor that's now ordered their second set. They're so pleased with it, and a lot of interest really across numerous operators in bringing more automation to that process as well, along with digital support. Then on the production side, we also continue to innovate and offer a lot in the way of edge compute and condition-based monitoring to optimize production.

We're very excited about our new Extract ESP products as well. It's a new place for us to deploy our edge compute capabilities to drive better efficiencies and automation through the production process.

James West (Senior Managing Director)

That's great. Thanks. Thanks, Clay. Then maybe just a quick follow-up for me. With the, the rigs that are working today and about to go to work, clearly, over the last decade, it was tough, tough times, and they, you know, dramatically reduced the number, the amount of spare parts and stuff on the rigs. Are the rigs back up to kind of the normalized level of spare parts on the rigs that they usually require? I think for a deepwater rig, it's, you know, $50-$60 million or so worth of equipment.

Clay Williams (Chairman, President and CEO)

Yeah.

James West (Senior Managing Director)

Or are they still a little understaffed?

Clay Williams (Chairman, President and CEO)

Good, good question.

James West (Senior Managing Director)

They're back.

Clay Williams (Chairman, President and CEO)

The rigs that we're reactivating, we've got close to 30 now that we're working on now. Part of the reactivation plan will be to replenish those spare parts that they depleted and our customers, as you know, are really, really good at cannibalizing and going to their unutilized rigs and cold stacked and even warm stacked rigs to source spare parts, both land and offshore.

So most of these rigs have been picked over already. So part of the reactivation plan for the rigs that we're working on now includes replenishing spare parts and so they can go back to work. I guess probably to fill in the rest of the picture too, it's interesting, there were a lot of rigs that were delivered, you know, 2014, 2015, 2016, 2017, on the back end of the last kind of capital super cycle.

Those rigs are facing a 10-year special purpose survey, and so they have to come into a shipyard and be inspected and that's a pretty major waypoint in their lives and an opportunity for NOV to again rebuild equipment, replace equipment, add additional capabilities that maybe their oil and gas operator customers want to add while those rigs are in the shipyards. So we're kind of coming up to that for a lot of rigs in the fleet right now.

James West (Senior Managing Director)

Got it. Thanks, Clay.

Clay Williams (Chairman, President and CEO)

You bet. Thanks, James.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is gonna come from the line of Tom Curran with Seaport Research Partners. Your line is open. Please go ahead.

Tom Curran (Senior Equity Analyst)

Good morning, guys.

Clay Williams (Chairman, President and CEO)

Hi, Tom.

Jose Bayardo (SVP and CFO)

Good morning.

Tom Curran (Senior Equity Analyst)

Clay, within that masterful, you know, expansive refresher you just gave us on all of the exposure and areas that NOV participates in, right? From drilling all the way through, down to production, you know, infrastructure, capital equipment services. If we were to see, you know, a significant step up in offshore orders coming out of 2024 into 2025, where would you most likely expect it to come from?

Would it be, do you think, on the offshore drilling front in the form of upgrades or cold stack reactivations? Would you expect it to be, you know, the ramp in FPSO projects, maybe, you know, subsea infrastructure, like flexible pipe and other subsea hardware?

Clay Williams (Chairman, President and CEO)

Yeah.

Tom Curran (Senior Equity Analyst)

Could you just give us an idea of sort of what the sequence of acceleration could look like to the extent we get some? Like I get the difference with this recovery, you know, it's slower, steadier, but if we get an acceleration within offshore, where would you expect it?

Clay Williams (Chairman, President and CEO)

First, the rig reactivation offshore is underway. As I mentioned, we're reactivating a lot of rigs right now. You know, although you know, never say never in this industry. At some point in the future, we will see a new round of rig building. That's not in our near-term forecast.

What I think is more likely to surprise to the upside is all the other more production-related offshore kit that NOV can provide to the FPSOs, including the flexible pipe and all the things that I just went through. We have a very large and meaningful opportunity there, and that's a little bit later. You know, these companies pull the trigger on their FIDs.

The projects then are kind of typically moved to EPCs for more detailed planning and drawings and purchasing, and so the awards are a little later in that sort of cycle, and I think that's kind of what's next for NOV.

But I also want to say, shifting over to renewables, we have a fantastic opportunity that we haven't talked much about in the past, but it's around floating wind in particular in the North Sea, where we're working closely with kind of a partner over there or a party that's pursuing development. That's a, you know, multibillion-dollar kind of opportunity for NOV, and then has implications for floating wind in deep water areas in Asia as well.

So, not in the traditional oil and gas space, but in renewables. So we could see some help from that area as well. Then that's on top of the wind turbine installation vessel in shallower waters, the fixed wind installation vessels that Jose mentioned.

You know, we wouldn't be surprised to see a couple of orders for WTIVs in 2024, plus sort of growing demand for cable lay vessels that also support those offshore shallow water installations as well. So there's a lot happening offshore, and that's really good for NOV, given our high mix and high level of participation and expertise in that area.

Tom Curran (Senior Equity Analyst)

Got it. Got it. Thanks for highlighting what's happening on the renewable side as well. Just as a follow-up here then, you had mentioned that Jose has some stats with regards to where you're at currently with reactivation, recertification, and upgrade projects. I believe your backlog around this time last year stood at, I have 83 projects. Could you just give us an updatehen on where you're at?

Clay Williams (Chairman, President and CEO)

Yeah. When I think I mentioned just a moment ago, 30 offshore rig reactivation projects. Those are, those are all that are north of the $2 million number each.

Tom Curran (Senior Equity Analyst)

Got it.

Clay Williams (Chairman, President and CEO)

We have a lot of smaller rigs that we also do work on, that we also log in as projects.

Tom Curran (Senior Equity Analyst)

Thanks for taking my questions.

Clay Williams (Chairman, President and CEO)

Yeah. Thank you.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is gonna come from the line of Scott Gruber with Citigroup. Your line is open. Please go ahead.

Scott Gruber (Managing Director and Senior Analyst)

Yes, good morning.

Clay Williams (Chairman, President and CEO)

Morning, Scott.

Jose Bayardo (SVP and CFO)

Hey, Scott.

Scott Gruber (Managing Director and Senior Analyst)

Clay, I'm curious how the Saudi CapEx shift impacts NOV. I imagine when these jackets go down, there's eventually a hit to Grant Prideco and potentially some other product lines. But then you have a greater quantum of onshore rigs going to work over the next few years, which all require new pipe and bits, et cetera, at startup. So if you put the new builds to the side, which have long been contracted, how should we think about the Saudi CapEx shift towards onshore impacting NOV?

Clay Williams (Chairman, President and CEO)

Yeah, it's a good, it's a good question, Scott. We would prefer they would keep both sets of rigs running, but that doesn't fit their plans. We understand the Energy Ministry directing Aramco to back off adding a million barrels per day, given that the natural gas liquids coming from the gas developments are gonna add liquids to the kingdom, and as well, they'll displace black oil that they were burning for electricity generation over there.

So It makes sense, I guess. That's led, as you know, to the suspension of, I think they've announced 20 jackups contracts suspended, maybe a couple more to come. The good news is, six of those that have been suspended so far have either secured work elsewhere or are very close to securing elsewhere, a couple in the Arabian Gulf, a couple in India, I think one in Africa, one in the Asia Pacific area.

So they're finding homes elsewhere, and so we're hoping we'll continue to support those rigs as they move to other markets. On the positive side of that ledger, though, we continue to be very excited about the kingdom's goal to lift their gas production 2.5 BCF per day, mostly coming from their unconventional Jafurah gas field development, which they FID, I think, back in 2020. The rig count there has continued to grow.

They are securing new rigs for both that as well as, I think, additional gas production out of South Ghawar, and just a couple of weeks ago celebrated 23 new rigs they're bringing into the kingdom. That's in addition to the rigs that we're building in the kingdom for Sanad that are going to work.

What's interesting to us about that, there's a couple of things that are. First of all, the rigs that they're bringing in are all AC powered. They're all available to be more closely controlled with electronics and software. It's really a step up in technology, and I think that speaks to Aramco's desire as well as other NOCs around the kingdom, around the Gulf.

We're seeing the same desire to bring in better technology rigs and to help sort of bridge the performance gap between the rig fleet that they have versus the rig fleet that—what, what they can do. So that's a, I think, a good development for us. Then the other way, NOV can, can and is, participating in that is through the supply of all of the production, equipment and kit that I mentioned earlier.

You know, we manufacture, chokes in the kingdom. We're, we're the largest, provider of production chokes worldwide, the largest provider of composite piping systems worldwide, and, and we're seeing big orders and a lot of, demand in the kingdom to support gas production in both of those areas, in addition to separators, to, gas dehydration technologies. Again, we're the largest provider of that. So there's a lot of ancillary kit that get pulled through those gas developments that will benefit NOV as well.

Scott Gruber (Managing Director and Senior Analyst)

Then as the jackups go back to work, is that seeding, you know, upgrades to equipment? You know, are there dollars flowing to NOV as those rigs mobilize elsewhere?

Clay Williams (Chairman, President and CEO)

It may. It depends on what their operator in these new markets wants. I would say most upgrades to Drilling Equipment today are really prompted by the operator customer requiring that. There's not a lot of speculative investment by offshore drilling contractors, given what most of them just went through, around adding equipment.

But the operators are stepping up and helping them out by paying higher mob fees or paying for new equipment through the day rate, and they're also offering longer terms. I think for both jackups and floaters, you're seeing fixtures extend out to be longer contracts so that both parties have a shot at getting payback on these new capital investments and new capabilities in the rigs. That's kind of the dynamic at work there. So it depends on what the operators in these new markets want.

Scott Gruber (Managing Director and Senior Analyst)

I got it. I appreciate the color, Clay. Thank you.

Clay Williams (Chairman, President and CEO)

You bet.

Operator (participant)

Thank you, and one moment for our next question. Our last question is gonna come from the line of Kurt Hallead with Benchmark. Your line is open. Please go ahead.

Kurt Hallead (Senior Analyst)

Hey, good morning, everybody.

Clay Williams (Chairman, President and CEO)

Hi, Kurt.

Jose Bayardo (SVP and CFO)

Good morning, Kurt.

Kurt Hallead (Senior Analyst)

I always appreciate the, the color and, and the insight. Very informative. Thank you. So I got, one big picture question and then, and one, one financial question. So let me hit the financial question up first, right? You guys referenced you, you still have, more coming on the, you know, cost reduction front. So appreciate that dynamic.

As we get out beyond 2024, I'm just kind of curious as to, you know, what do you see the primary driver, for margin improvement? Do you think it is gonna be more internal, or is it gonna be external, for example, like pricing power or, you know, those dynamics? Just, just a little—how, how you, how you... I'd like to get your sense on how you're thinking about the margin improvement once you get beyond 2025 or 2024, excuse me.

Jose Bayardo (SVP and CFO)

Hey, hey, Kurt. Thanks for the good question. I'll start off, and Clay will—I'm sure will want to chime in on this one as well. But I think what we see is there are several opportunities to continue to see an improvement in our margin over the next several years.

So obviously, you touched on the cost out program. We're still in the relatively early phases of that $75 million cost out program. Really got started at the very end of last year, and we've probably worked about—we have worked our way through about 30% of that at this point in time. We expect that to pick up a bit into Q2, which is why you see an improvement in the incremental margins.

But we're always gonna be- but really expect that to wind out as we work our way through Q3 and Q4. We're gonna continue to look for other opportunities. We're always looking to streamline and optimize the operations within the company.

But the bolt-ons we've done, obviously done a tremendous amount of heavy lifting over the last several years, and this is another small step, relatively speaking, from a cost out standpoint, that we'll have wrapped up in 2024.

As we get into 2025 and beyond, you're gonna see the continued progression of lower margin contracts and projects winding out of the system. We've been seeing that over the last several quarters. We'll see that gradually take place through the remainder of 2024.

Then, as Clay touched on, expectations for one of our businesses in particular to really come to an end of some of those contracts quite suddenly, really at the end of 2024, and should more or less be a step change in 2025, which should allow more margin improvement. That's one out of many businesses, but still, still, still makes a difference.

Also, we'll continue to see improved absorption across the entire footprint. I think when we get into 2025, we'll see continued strong activity in international offshore markets, and we expect North America to be much healthier. Right now, we have crosscurrents with international more than offsetting what's happening in North America, but North America is certainly a drag.

If we can get all eight cylinders firing, that's another step up from a margin improvement standpoint, just from a throughput point of view. Then lastly, pricing. You know, as the cycle progresses and advances and matures, that's really when we have a better opportunity once capacity is fully absorbed, and it becomes more of a conversation of how quickly can I get something versus what's the price. That's sort of the final leg up that we are looking forward to and counting on in the not-too-distant future.

Kurt Hallead (Senior Analyst)

That's, that's great color. Then, and then Clay, bigger picture dynamic, right? We've had a lot of discussion of late, increasing crescendo of discussion around, you know, the, the data center build-out and what that's going to mean for, you know, grid demands, et cetera, right?

Jose Bayardo (SVP and CFO)

Right.

Kurt Hallead (Senior Analyst)

You know, I guess I'm curious on two fronts. Number one, do you see an opportunity for NOV to provide some element of equipment into the data center build-out infrastructure, and/or, you know, what do you think the ultimate pull is gonna be with respect to your customer base, right, in terms of drilling activity frac activity, and so on?

Jose Bayardo (SVP and CFO)

Yeah. I think we're probably, frankly, more likely to be a customer of those data centers as our digital offering continues to grow. I mean, we're employing artificial intelligence and a lot of sophisticated edge compute and cloud offerings, which is growing pretty rapidly here.

But the kind of the second order implications for our business is these, as we both know, these data centers are gonna drive up electricity demand across the U.S., which is gonna require more natural gas, require more sources of electricity, including renewables.

Kurt, as you're aware, we're pursuing very disruptive in technology in the land wind space that we're pretty excited about through our Keystone efforts and making good progress there. I think NOV's participation in that phenomenon of U.S. electricity demand rising sharply is gonna be more around helping our customers actually provide that electricity, both renewables as well as in the traditional natural gas space, and so really kind of interesting developments in that area.

Kurt Hallead (Senior Analyst)

For sure. Okay, that's great, guys. Thank you. Appreciate it.

Jose Bayardo (SVP and CFO)

Thank you. Thank you, Kurt.

Clay Williams (Chairman, President and CEO)

Thanks, Kurt.

Operator (participant)

Thank you, and I would now like to hand the conference back to Clay Williams for further remarks.

Jose Bayardo (SVP and CFO)

Thank you, Michelle. Appreciate everyone joining us this morning, and we look forward to speaking to you again in July when we report our second quarter earnings. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.