NOV - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $2.10B (-2% y/y), diluted EPS $0.19, and adjusted EBITDA $252M (12.0% margin), with operating profit $152M (7.2% of sales).
• Versus Wall Street consensus, NOV slightly beat revenue ($2.103B vs $2.096B*), delivered an adjusted EBITDA above consensus ($252M vs $247M*), and missed EPS ($0.19 vs $0.255*). The miss was driven by mix shift and lower shorter-cycle capital equipment demand in Energy Products & Services (EPS), plus unfavorable discrete tax items and lower equity income.
• Energy Equipment (EE) execution and pricing drove 430 bps y/y margin improvement (14.4% EBITDA margin), while EPS margins compressed on mix; backlog ended at $4.41B and orders were $437M (book-to-bill 80%).
• Q2 2025 guidance: consolidated revenue down 1–4% y/y and adjusted EBITDA $250–$280M (EPS down 5–8% y/y, EE flat to +1% y/y); management flagged tariff headwinds ($8–$10M in Q2, ~$15M/quarter thereafter) and a weaker H2 activity backdrop.

What Went Well and What Went Wrong

What Went Well

• Energy Equipment profitability: adjusted EBITDA up $46M y/y to $165M (14.4% margin), supported by higher-margin backlog and strong execution; EE operating profit rose to $134M and backlog reached $4.41B.
• Cash generation and capital returns: $135M CFO and $51M FCF; returned $109M via $81M buybacks and $28M dividends; board later declared an additional $0.21/share supplemental dividend for 2024 true-up.
• Strategic technology wins: agreement with Petrobras to address CO₂ stress corrosion in flexibles; integrated cable-lay award for offshore wind; record downhole runs and broader AI-driven DBA adoption across 20M feet.
  • “We executed well on our large backlog of offshore production technologies... and continued to drive accelerating adoption of our new, differentiated technologies” — Clay Williams, CEO.

What Went Wrong

• EPS segment pressure: revenue down 2% y/y to $992M; adjusted EBITDA down $29M y/y to $145M (14.6% margin) on lower shorter-cycle capital equipment demand and less favorable mix.
• Tariff exposure and macro: management expects $8–$10M tariff expense in Q2 and ~$15M/quarter thereafter; H2 activity likely softer given trade tensions, weakening outlook, and incremental OPEC+ supply.
• Discrete items: $13M “Other Items” (severance, Russia deconsolidation) and unfavorable discrete tax items impacted net income and EPS.

Transcript

Operator (participant)

Good day, and welcome to the Q1 2025 NOV earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one, one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Amie D'Ambrosio, Director of Investor Relations. Please go ahead.

Amie D'Ambrosio (Director of Investor Relations)

Welcome, everyone, to NOV's first quarter 2025 earnings conference call. With me today are Clay Williams, our Chairman and Chief Executive Officer; Jose Bayardo, our President and Chief Operating Officer; and Rodney Reed, our Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release, available on our website.

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

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

These are typically long duration, requiring a longer view, and projects continue to move forward in places like the Arabian Gulf and Brazil, and in unconventional plays like Saudi Arabia's Jafurah Gas Field and Argentina's Vaca Muerta region, areas where NOV technologies play a critical role. NOV is well positioned to weather this latest storm. Our teams have streamlined operations and improved working capital efficiency. We have a solid balance sheet, and our cash flow has been strong. We have introduced dozens of new products that demonstrably improve the efficiency, safety, and environmental impact of our customers' operations. These products have gained significant share. Our backlog of capital equipment and projects has grown steadily over the preceding four years, with margins that have moved up meaningfully. Despite near-term macro challenges, NOV is well positioned for where the market is going longer term. U.S.

Shales have been the most extraordinary phenomenon ever witnessed in this industry. It accounted for almost all incremental global production through the past decade, adding about 7 million barrels of oil per day and crowding out offshore investments along the way. If North American shale activity slows meaningfully in the second half of the year, it would exhibit high decline rates, just like it did during COVID. Either way, U.S. production will peak sooner or later, and in the coming decade, we believe incremental production growth will come from a combination of deep water and international shales. Both will need technologies and picks and shovels that NOV is uniquely positioned to supply. I know many of you have questions about the impact of tariffs on our operations. Frankly, we do too, as the tariff regimes and trade negotiations evolve and shift daily.

In a moment, Jose will provide you more color, but the upshot is that we believe that this will be manageable for NOV, and our teams will be able to significantly reduce, 80% or more, but probably not fully eliminate the full effect of known tariffs. About half of NOV's manufacturing capacity is in the United States, with the remainder spread out in various countries around the world, and we have a lot of options to adjust our supply chains. We are working closely with vendors and customers to mitigate the effects. More importantly, we have terrific supply chain managers who successfully navigated disruption from tariffs in 2017 and again during COVID. They are steely veterans of this kind of thing. Before Rodney takes you through our first quarter results, let me say thank you to our employees.

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

Rodney Reed (SVP and CFO)

Thank you, Clay. For the first quarter of 2025, NOV's consolidated revenue decreased 2% year-over-year, and adjusted EBITDA was $252 million, an increase of 5%. EBITDA margins expanded 80 basis points to 12%, resulting in our 14th straight quarter of year-over-year EBITDA margin improvement. Strong execution improved pricing on projects in our backlog, growing adoption of our new higher-margin technologies, and focus on operational efficiency more than offset the impacts of reduced global activity.

Higher EBITDA and better working capital efficiency improved our operating cash flow and allowed us to generate positive free cash flow in the first quarter, which is typically a cash-consumptive free cash flow quarter. NOV generated $135 million in cash from operations during the first quarter and $51 million in free cash flow when considering our capital expenditures of $84 million. During the first quarter, we repurchased 5.4 million shares for $81 million and paid $28 million in dividends. Over the last 12 months, we have increased our cash balance by $689 million, converted over 100% of our EBITDA to free cash flow, and returned $426 million to our shareholders through dividends and share repurchases. As a reminder, through 2024, we returned 41% of our excess free cash flow.

Based on our return of capital framework, we expect to pay a supplemental dividend of around $80 million to true up our returns to 50% of our 2024 excess free cash flow. Subject to the approval of our board of directors, we expect the timing of the supplemental dividend payment to be in mid-June. Our first quarter consolidated net income of $73 million, or $0.19 per fully diluted share, was impacted by lower equity income, unfavorable discrete items to our tax rate, and an increase in unallocated corporate cost. During the second quarter of 2025, we expect eliminations in corporate cost to return to a range of $45 million-$55 million, and we still expect our full-year tax rate to be between 26%-28% for the year.

Moving on to segment results, our energy product and services segment generated revenue of $992 million, a 2% decrease compared to the first quarter of 2024, due to lower global activity, partially offset by growing adoption of our new performance technologies. EBITDA declined $29 million to $145 million, or 14.6% of sales. The higher decrementals were primarily the result of a decline in shorter-cycle capital equipment sales that contributed to a less favorable sales mix across our portfolio. As Clay mentioned, our teams continue to execute a number of initiatives to reduce cost and improve operational efficiencies. For the first quarter, the sales mix for energy products and services was 52% services and rentals, 30% capital equipment, and 18% product sales. Services and rentals improved 4% year-over-year due to a full quarter contribution from our artificial lift business and growing market share in our drill bit and downhole tool businesses.

Excluding our 2024 acquisitions, revenues from services and rentals were flat, outpacing global drilling activities, which declined 5%. Our high-performance drill bits, with our latest cutter technology, continued to drive increased market penetration, resulting in revenue growth of over 20% year-over-year in the U.S. against the 6% rig count decline over the same period. Our downhole business also continued to gain share, with more customers recognizing the benefits of our Series 55 drilling motors, ERT power sections, and the latest generation of our friction reduction tools. Revenue from product sales decreased 13% compared to the first quarter of 2024. The decline was primarily driven by lower activity in Saudi Arabia and Mexico, partially offset by a solid increase in sales of NOV's TK glass-reinforced epoxy liners in the Middle East.

Turning to capital equipment, sales decreased 5% year-over-year due to reduced drill pipe and managed pressure drilling equipment sales, partially offset by increased demand for offshore conductor pipe connections and continued strength in demand for composite pipe to build out infrastructure necessary for the development of unconventional resources in the Middle East. We also realized mid to upper single-digit growth in sales of solids control equipment, resulting from the continued market adoption of our Alpha Shale Shaker. For the second quarter, we expect revenues from our energy products and services segment to be down 5%-8% when compared to the second quarter of 2024, with EBITDA between $140 million and $160 million. Moving to energy equipment segment, revenue for the first quarter of 2025 was $1.15 billion, down 3% from the first quarter of 2024.

Despite slight decline in revenue, EBITDA increased $46 million to $165 million, resulting in a 430 basis point increase in margins, or 14.4% of sales, driven by higher margin backlog and continued focus on operational efficiencies. This was the 11th straight quarter of year-over-year margin growth for the energy equipment segment. Capital equipment sales accounted for 57% of the segment's revenues in the first quarter of 2025, with aftermarket sales and services accounting for the remaining 43%. Starting with capital equipment, revenue grew mid-single digits year-over-year, led by growth in drilling equipment and subsea flexible pipe. Bookings for the first quarter were $437 million, an increase of 12% year-over-year. Book-to-bill for the quarter was 80%. Backlog of $4.41 billion increased 12% from the first quarter of 2024, supported by our trailing 12-month book-to-bill of 122%.

We continue to have constructive dialogue with customers who have given us line-of-sight opportunities that could lead to a book-to-bill of around one for the year. However, we would not be surprised to see projects pushed to the right, given heightened uncertainty and deteriorating market conditions. Our subsea flexible pipe business continues to have strong performance. Revenues grew year-over-year in low teens % range with significant margin improvement due to strong execution on higher margin backlog. Backlog for the business at the end of the current quarter has almost doubled since the end of the first quarter of 2024. Our process systems business had another strong quarter with revenue growing high single digits year-on-year, including the booking of a gas dehydration package for a national oil company in the Middle East.

The outlook for offshore production remains robust, with 2025 showing potential to have more awards for FPSOs than 2023 or 2024, which drives demand for process systems, flexible pipe, turret and spread mooring systems, cranes, chokes, and boarding valves in composite solutions. Revenue for intervention and stimulation capital equipment improved high single digits over the first quarter of 2024, led by sales of coil tubing and wireline equipment, more than offsetting the lower demand for pressure pumping equipment in North America. Internationally, Argentina, Brazil, and the Middle East remain bright spots, specifically for our advanced wireline and coil tubing product lines. Revenue from sales of drilling equipment increased in the mid-teens % range year-over-year due to increased progress on both land and offshore projects, including initial work on the new build jackup we announced previously.

We delivered our 11th new build high-spec land rig in Saudi Arabia during the first quarter. We continue to have discussions with customers for certain capital equipment upgrades, including BOPs, increased hook load capacities, and robotics. Our marine and construction business experienced a high single-digit decrease in revenue compared to the first quarter of 2024, as higher revenue from pipe and cable vessels did not offset lower activity for wind turbine installation vessels. Given the macroeconomic uncertainty and unclear impact of tariffs, we may see a slowdown in project FIDs, pushing the expected shortage of WTIVs out a year. However, we continue to have active dialogue with several customers and still see the potential for up to two orders later in the year. The cable vessel market is continuing to show strength as we booked an additional inter-array cable equipment package during the first quarter of 2025.

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

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

Jose Bayardo (President and CFO)

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

As it pertains to tariffs, the situation remains fluid, with each of our businesses having different exposures, and we believe some will actually realize improved competitive positioning as a result. I'll highlight two representative examples that illustrate the impacts tariffs can have on our businesses. Our downhole tools operation manufactures, rents, and sells a wide array of drilling technologies and has a wide base of global suppliers and manufacturing sites. Additionally, the operation has a book of businesses that is more skewed to North America, given the business's emphasis on providing leading-edge technologies that improve drilling efficiencies for extended lateral wells. Based on the tariff regimes that exist today, if we took no action, the business would realize a material reduction to its EBITDA margins. We have not been sitting idle.

In fact, we began taking actions to diversify our supply chains away from higher-risk markets beginning back in 2022 by finding new vendors and by pushing some existing suppliers to open manufacturing operations in lower-risk countries. The majority of downhole businesses' manufactured parts are sourced from outside the U.S. The sources of tariff exposures are, one, parts consumed to assemble products for sale and rental in the U.S., and two, parts that are assembled into finished tools in the U.S. that are then exported for sales into international markets. Most of the businesses in our portfolio have the same types of supply chain exposure, so our playbook is pretty consistent and includes, one, leveraging NOV's substantial U.S. manufacturing footprint to reshore as much content as possible for products destined for U.S. customers, two, utilizing the U.S.

MCA to the full extent to also leverage NOV's manufacturing capabilities in Mexico and Canada, three, rerouting manufacturing and assembly operations for products destined for non-North American markets to our international manufacturing plants, four, sourcing raw materials from the U.S. or from lower tariff countries when possible, and five, to the extent we can't yet find suitable alternate suppliers, negotiating discounts with vendors in higher tariff countries to share costs. It takes substantial time and effort to incorporate new vendors into our supply chain. We must ensure that they meet our quality specifications and remap scheduling to account for what may be longer lead times and shipping distances. In certain areas, we've been able to work with vendors to have them stock inventory in the U.S. prior to tariffs coming into play, giving us a little more time to navigate through the significant changes.

Our supply chain and compliance personnel have been working nights and weekends as we navigate through these changes efficiently and effectively for our customers and for our shareholders. I'd like to extend my sincere gratitude to them for the great work they are doing. We expect the actions that are currently in motion for our downhole business should eliminate more than two-thirds of the currently known tariff costs. We are developing and implementing additional plans to further reduce the exposure. If we're unable to eliminate the higher costs, we expect to pass them on to our customers. Near term, we will not be able to outrun the impact of tariffs on shipments that are in transit, and there will be unanticipated second-order effects, including the inflationary impact and extended lead times caused by all global manufacturers simultaneously trying to rewire their supply chains. We have already seen some U.S.

Vendors increase prices for steel and other components that now have reduced competition from foreign sources due to tariffs. Our best estimate is that NOV's consolidated results in the second quarter will include $8-$10 million in tariff expense that we may be unable to avoid. Beyond the second quarter, we estimate the tariff impact net of our mitigation efforts will increase to approximately $15 million per quarter. These estimates assume we are able to pass costs from the second-order effects I just described onto our customers. The actions we are taking that I have described so far are defensive, but there are areas where we expect to play offense, which brings me to the second example.

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

If today's tariff regime remains in place, customers will be able to purchase our premium drill pipe, which offers superior technology and quality at prices that are much more competitive. We are looking forward to having a more even playing field. We are not just working to mitigate tariff costs. We are using this as an opportunity to continue making NOV better as a whole. As we reorganize our supply chain, we are driving better coordination across our groups to mitigate tariff impacts and to better leverage NOV's consolidated spending power. We are also pushing even harder on other initiatives to lower costs and become more efficient.

We're applying more automation and artificial intelligence technologies in our manufacturing operations, as well as employing more traditional methods for driving efficiencies, including, one, eliminating layers within parts of the organization, reducing costs, and making the organization more agile; two, consolidating manufacturing operations, which allows us to improve utilization of our assets, increase throughput, and reduce overhead; three, pushing more of our back-office processes into shared services; and four, focusing on continuous improvement with more frequent good old-fashioned Kaizen walkthroughs, where we work to debottleneck, optimize, and improve processes in our manufacturing operations. We're focused on getting more efficient every day. The goal is to make sure we can provide our customers with the critical equipment they need at compelling value while we improve results for our shareholders. To provide that compelling value, cost is only one side of the equation.

We're also relentlessly focused on making sure we have the right technology and offerings for our customers. We're in this for the long haul. We position the company to weather any storm and to invest in the future, regardless of where we are in the cycle. We don't know exactly how the current geopolitical and macroeconomic issues will play out over the near term, but we are confident in and focused on the longer-term outlook and on three trends that we believe will drive the industry over the next decade. One, offshore production supplanting U.S. unconventional resources as the dominant incremental source of global oil supply; two, outsized demand for natural gas driving meaningful growth from global unconventional gas resources; and three, the application of modern digital and AI technologies driving additional efficiencies in oil field operations.

These trends will not only drive the business long-term, but will also be areas of strength near term, regardless of the broader market environment. We've spent a good bit of time on our recent calls talking about our digital solutions and how we're supporting the rapid expansion of activity in international unconventional resources. Today, I want to focus on the offshore. As Clay noted, U.S. unconventional resources have accounted for almost all incremental oil production, but it is plateauing. It has been amazing, and while we aren't ready to call for a peak in U.S. production—do not ever discount what this industry can do—the declining number of remaining tier-one drilling locations and firmly entrenched capital discipline should prevent the type of growth we've seen over the past decade and a half.

Our offshore operator customers share this view, which is giving them the confidence to make significant long-term bets in deep-water offshore projects. Unlike investments in U.S. shale wells, which can deliver cash flow within a year of making an investment decision of $5 to $10 million, deep-water developments can cost billions of dollars and typically have minimum investment horizons of 5 to 10 years. Where deep-water shares a common trait to shales is that technological advancements have delivered material improvements in drilling and production efficiencies. These advancements are allowing the industry to push into highly prolific frontiers that were unimaginable to produce from a couple of decades ago. Today, we're drilling deeper wells and deeper water in harsher conditions with higher pressures through tighter pore pressure windows, and we're doing this with amazing efficiencies.

Much of what the deep-water industry is developing today has break-evens in the $40 per barrel range, the result of incredible technology and industrialization. It doesn't get the attention it deserves, but deep-water drilling efficiency gains are not dissimilar to those realized in the U.S. land market. High-spec seventh-generation rigs are drilling at rates 30-40% faster than they were a decade ago, thanks in large part to the equipment and technology that NOV has been delivering. Our control systems, automation, machine learning, and AI algorithms, and now robotics dramatically improve drilling efficiencies and safety. Today, we have 22 automation upgrades in process, and many other customers are evaluating such upgrades. Our downhole broadband services that utilize wire drill pipe for high-speed data transmission, along with our managed pressure drilling equipment, allow operators to safely and efficiently navigate through high-risk zones with tight pore pressure windows.

In these formations, operators are at high risk of unintentionally fracturing a zone, resulting in a well control or lost circulation issue, or ruining well economics by not being able to drill a sufficiently long lateral through a pay zone. Our 20,000 PSI blowout preventer, the only equipment of its kind in the market, has enabled safe development of the Paleogene in the U.S. Gulf and is driving exploration in similar previously untouchable, extremely high-pressure reservoirs in other parts of the world. Even our more basic-sounding lifting and handling upgrades for ultra-deep water drilling have been critical to the industry's success. These upgrades are required to handle the intense stress of pushing or pulling a rotating string of high-spec drill pipe through over 7,000 feet of water and another few miles below the seafloor.

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

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

However, if we are correct in assuming offshore production will supplant U.S. land as the provider of incremental supply to the global market, given the extremely long timeline for deep-water projects, the industry cannot afford to put these projects on a shelf for any extended period. The outlook related to the offshore and international unconventional resources remains bright, as does the central role that the people and technology from NOV bring to the industry to enable safe and efficient operations. With that, we'll open the call to questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Jim Ralison with Raymond James. Your line is open.

Connor Jensen (Senior Equity Research Associate)

Hey, guys. This is Connor Jensen in place of Jim. Thanks for taking my call today.

Clay Williams (Chairman, President, and CEO)

Hi. Good morning, Connor.

Connor Jensen (Senior Equity Research Associate)

Given the guidance and comments around potentially a weaker second half, how are you thinking about 2025 margins relative to 2024 and the past commentary of looking at up 50 to 150 basis points? Thanks.

Rodney Reed (SVP and CFO)

Yes, Connor. Hey, this is Rodney. Just to give some color in terms of where we're looking at 2025, you have obviously Q1 actuals. We've provided some detailed guidance on Q2. What I'll try to do is kind of walk through the second half compared to the first half of 2025. As we look at our two different segments, energy equipment, as you know, is a little bit more backlog-driven business.

As we look at the moving parts there, both in terms of a strong backlog on some of our offshore production processing equipment and our rig aftermarket business, first half to second half for the EE segment overall would look to be about flat from a revenue perspective. On the EPS side, we would look to have some growth first half to second half in the ballpark of 3-5%. Generally, in the second half of the year, we have more product capital equipment sales and also some businesses in there, including our composite pipe or fiberglass business, which is still growing primarily from infrastructure build-out in the Middle East. Put those together, that is sort of 3-5% growth on the EE side.

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

Connor Jensen (Senior Equity Research Associate)

Yeah. That is very helpful. Thanks. Just one more thought. International revenues tick down from 65% to 61%. Guessing this was just kind of a seasonal pullback, but given the commentary on the international and offshore market, I suspect this portion of the business will continue to grow as a share of the business going forward.

Jose Bayardo (President and CFO)

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

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

Connor Jensen (Senior Equity Research Associate)

Great. Thanks. I'll turn it back.

Operator (participant)

Thank you.

Jose Bayardo (President and CFO)

Thanks, Connor.

Operator (participant)

One moment for our next question. That will come from the line of Arun Jayaram with J.P. Morgan Securities. Your line is open.

Arun Jayaram (Research Analyst)

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

Jose Bayardo (President and CFO)

Yeah. Hey, Arun, Jose. Yeah. I think Rodney did a good job of touching on it in his prepared commentary. Again, just to reiterate, a lot of uncertainty. In that type of environment, it's not one where people get really excited pulling a trigger on a big capital equipment purchase. Having said that, particularly if you look at the deep-water offshore marketplace, these aren't short-term bets that they're making.

They are making massive multi-year investment decisions with very low expected break-even costs. The confidence and conviction that we're seeing from our customers on the offshore deep-water market side of the equation continues to be very strong. I also talked about FPSO opportunity. Rodney touched on it in his commentary as well. The outlook there still looks very strong. As mentioned, potentially 12 different FPSOs from which we could receive awards in 2025. I would not be surprised if some of those slipped a little bit. You talked about some potential for things to push to the right, but I do not think these things are going away. None of our customers are giving any indication that these things are going away. I feel really good about the outlook overall related to the offshore environment.

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

While there certainly have been some challenges with some suspensions of rigs, particularly within Saudi, the high-spec modern rigs that are working, they're recognizing the performance and the impact that that's having. That's really important with unconventional manufacturing type development. We're talking to multiple customers in the Middle East about new rigs. We'll see how that plays out. Right now, things are looking pretty good. If you go to other parts of the business, I think Rodney touched on kind of the dynamics that are happening with offshore wind. Economics for offshore wind still look really good within Western Europe and Asia, but there is a little bit of a reaction related to all the disruption that's taken place from trade developments and uncertainties. We've tempered our enthusiasm a little bit for the number of development FIDs that will transpire.

Therefore, we kind of push back that really critical point in time when we think there will be really unbearable tightness in terms of supply demand for WTIVs. We are still actively engaged with multiple customers for WTIV vessels this year. We think that will still likely translate into a couple of orders potentially in the second half of 2025. Also, think about our process systems, a lot of demand feeding into the FPSOs that I touched on earlier. Really good outlook for capital equipment overall. Again, there will be puts and takes, but generally, things are still heading in the right direction.

Arun Jayaram (Research Analyst)

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

Clay Williams (Chairman, President, and CEO)

Absolutely. Actually, we're really, really pleased with our team and the creative solution that they've come up to help Petrobras address their stress corrosion cracking problem. The fluids in their subsalt basin down there have a high percentage of CO2, which is pretty tough on steel. We've got an approach that's different than our competitors, and we think it's going to be very fruitful for us and for Petrobras. This has been a terrific business for us.

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

Arun Jayaram (Research Analyst)

Great. Thanks a lot. You bet.

Clay Williams (Chairman, President, and CEO)

Thanks, Arun.

Operator (participant)

Thank you. One moment for our next question. That will come from the line of Scott Gruber with Citigroup. Your line is open.

Scott Gruber (Director, Oilfield Services and Equipment Research)

Yes. Good morning. I appreciate all the tariff color. Certainly interesting times. Do your tariff mitigation efforts require additional CapEx to shift roof line or invest in fabrication equipment? Normally, I think you'd be looking to trim CapEx in the second half with this backdrop. Is that possible, or do the mitigation efforts include that?

Jose Bayardo (President and CFO)

Yeah. Hey, Scott, it's Jose. Most of the mitigation plans that we have in motion and additional ones that are planned really do not have a meaningful CapEx component to it. We've got a lot of flexibility in terms of our footprint. It's really about getting things positioned in the right place at the right time and working closely with our vendors to make sure that we are mitigating the cost as best as we can. It's really a lot of blocking and tackling. As I touched on, there's sort of five or six things that are really common elements in terms of what we're doing with each of our businesses.

Again, most of those do not really involve much in the way of CapEx. Now, there is kind of a blurry line between mitigation efforts and ongoing improvements to improve the operational efficiency within our business, which does take some capital investment and automation and robotics and things of that nature within our own operations. I sort of view that as separate and things that we were going to do anyway, regardless of the tariff mitigation. To your point related to kind of the environment that we are in, thinking outside of tariff mitigation and cost control, our CapEx program, you can sort of think of two very large buckets for 2025 when we sort of came into the year. One is really the build-out of some expansion opportunities, growth capital opportunities. In these unconventional resources and basins, we are seeing tremendous demand for investments, particularly related to midstream infrastructure.

It's driving a lot of demand for our fiberglass business. We have some localization efforts. We have some additions to manufacturing lines that are underway, and those will continue full speed ahead. The other part really relates to the build-out of our rental tool fleet associated with this great latest generation of tools and technologies that we're bringing to the market. We're continuing to see really rapid adoption of those tools. You could see us maybe slow things down a little bit if that appetite slows down later in this year. At this point in time, we're not seeing that. Certainly, CapEx, as we get in the second half of the year, might be skewed a little bit lighter than what we were originally thinking three months ago.

Scott Gruber (Director, Oilfield Services and Equipment Research)

Got it. Appreciate all that color. A follow-up on M&A, this economic soft patch, does it really manifest? May shake some opportunities available for NOV. How do you think about the areas that you could target from an M&A perspective? Would you want to beef up more on the production side? Do you look more for expansion into various industrial segments? Are there niche technologies of interest? Just some kind of broader color on M&A, especially given that the backdrop here is very different from four or five years ago.

Rodney Reed (SVP and CFO)

Yeah. This is Rodney. Just to give a couple of comments there. One, from an overall product portfolio perspective now, very pleased with our businesses that we have and what their exposure are to in markets. Really like what the portfolio is right now. I do not think we necessarily have to add anything to that.

Second point, really around M&A starts with our ability to continue to generate strong cash flow. We've touched on that in prior quarters in terms of our expectation to continue to generate, have a 50% free cash flow conversion of EBITDA and still feel good about that throughout the year. That continues to allow us to have flexibility in our overall capital return program. We've laid that out before in terms of maintenance CapEx, growth CapEx, and return to shareholders, with M&A being an element to that too. In the current environment, to your point, perhaps it generates some opportunities, but also in a more volatile time period, sometimes it's harder to get deals done. We're always looking for opportunistic opportunities to deploy capital in high-return environments.

If we see something out there that's a good fit for us, that's a good value, that returns a high return to our shareholders, we'll definitely take a look at it.

Clay Williams (Chairman, President, and CEO)

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

Scott Gruber (Director, Oilfield Services and Equipment Research)

I got it. Appreciate the color.

Clay Williams (Chairman, President, and CEO)

You bet.

Scott Gruber (Director, Oilfield Services and Equipment Research)

Thank you.

Operator (participant)

Thank you. One moment for our next question. That will come from the line of Stephen Gengaro with Stifel. Your line is open.

Stephen Gengaro (Managing Director)

Thanks. Good morning, everybody.

Amie D'Ambrosio (Director of Investor Relations)

Good morning, Stephen.

Stephen Gengaro (Managing Director)

Two questions I'll start with. One is you've given a lot of detail on the second half of 2025. When we think about the guidance for the second quarter, you are guiding margins up pretty nicely in energy products in the second quarter. Can you just talk about the drivers of that?

Rodney Reed (SVP and CFO)

Yeah. On the EPS side, just to repeat a couple of points there. Revenue down 5-8%. That's really sort of North America activity driven, as well as a couple of key international markets and some mix. As it relates to the margin side of things, that's also kind of mix related.

We have had a couple of headwinds as it relates to product and capital equipment sales, which generally have sort of a higher fixed cost element to that. Then secondarily on the volume side. I think those are the main drivers in terms of the delta period over period. Yeah.

Stephen Gengaro (Managing Director)

Great. Thanks. The other question, and this is probably a little hard to answer. I know Jose touched a little bit on this. When you think about the tariff mitigation efforts and how you sort of try to work to mitigate the impacts, how do you sort of assess investments that may be longer-term in nature but are addressing a situation which may not be in existence in three months? You know what I'm saying? How do you strategically make these decisions and remain flexible when there's fluctuations at the White House and how they're addressing these things?

Jose Bayardo (President and CFO)

Yeah. That's a great question, Stephen. At the end of the day, we do the best that we can, right? We pride ourselves on being very nimble and adaptive to changing environments that create challenges, but also create opportunities. The uncertainty does make it difficult to make long-term investment decisions. That's why we're pretty cautious as it relates to the precise timing on not only exactly what we're doing, but we put ourselves in our customer's shoes in a difficult environment to make capital investment decisions. There are some things that you know and have great confidence in that with kind of the forces that are at play, there shouldn't be a material impact. You plow ahead and move forward.

There are other things that cause you to rethink, "Okay, should I be building this plant here, or should I build it somewhere else around the world, or should I just wait another three months to see how the world shakes out?" These are all very active discussions that we, along with layers of the organization, are having on a regular basis, working very closely with our compliance teams and our supply chain folks and our customers to understand, "Okay, what are we going to need in the future, and how are these tariffs and other changes that are taking place in the world going to affect our operations?" Carefully, thoughtfully is the bottom line answer. We feel like our teams have done a great job of getting their arms around everything.

As I mentioned, we've got a lot of people that have been working really hard keeping up with the day-to-day movements of all the changes and potential changes that might occur.

Clay Williams (Chairman, President, and CEO)

Yeah. I'd add too, I think one of the real strengths of NOV coming into this is the diversity of our manufacturing footprint, our supply chains, and all that experience that Jose was just talking about has. They did a lot of hard work and heavy lifting through the first Trump administration when all of the Section 232 and 301 tariffs came into effect. Again, during COVID, we have been making a general move to do more nearshoring post-COVID. At the end of the day, we're entering this with a pretty good American manufacturing footprint. 52% of our machine tools are here in the United States.

A little more than half of our assembly space is here in the United States. It gives us just a lot of optionality to approach this. I think that's going to be increasingly important as these tariffs come into effect and are going to be a real benefit to NOV.

Stephen Gengaro (Managing Director)

Great. Thank you for the details.

Clay Williams (Chairman, President, and CEO)

Thanks, Stephen.

Operator (participant)

Thank you. One moment for our next question. That will come from the line of Roger Reed with Wells Fargo Securities. Your line is open.

Roger Reed (Senior Analyst)

Yeah. Thanks. Good morning.

Jose Bayardo (President and CFO)

Morning, Roger.

Roger Reed (Senior Analyst)

Morning, guys. I was hoping, Clay, to get a little more of your view here on the offshore as ultimately where the growth is going to come from and maybe how you think about some of the milestones we should watch for that signal. Is it going to be that companies are hesitant to cut here in the near term? Is it going to be FIDs we just need to watch? I'm just kind of curious, not so much the white space here in 2025, but as we look to the back half of this year and forward.

Clay Williams (Chairman, President, and CEO)

Yeah. First of all, I think the economics—this is what our customers tell us—the economics in the deep water in particular are very strong, very competitive vis-à-vis shale. That's the economic engine behind this. Yes, I think FIDs are going to continue in the deep water. We've been pleased over the past few years to ramp up in exploration. The number of new basins that have emerged from the Orange Basin in Namibia to continued success in Guyana to the Eastern Mediterranean, the emergence of natural gas as a viable offshore target.

All those things are contributing to activity in the offshore. As we've talked about on prior calls, a lot's been said about the white space and the drilling side of things. Our view is, and our customer's view is, that that has to do with the fact that the FPSO supply chain is sort of catching up with the capability to drill. I think that's going to continue to work towards a more balanced and higher levels of drilling activity in 2026. One of our customers made a nice announcement yesterday with respect to new contracts. I think we've passed through an extraordinarily unique time when you had sort of one style and one source of incremental oil for the global supplies effectively supply all of it through the past decade. Of course, I'm talking about U.S. shales.

That is close, we believe, to rolling over. It is not just us. The EIA says that U.S. production is going to peak in 2027. We can debate whether it will be earlier or later than that. I think generally the emerging consensus view is U.S. shales are going to roll over here sooner rather than later. When that happens, I think deep water is going to emerge as the next source of production. I think our customers get that. That is why, like José said, that is why we believe they are going to continue to move forward with these projects. They have got nice discoveries. They have got better technology. This whole level of industrialization that has gone on in the deep water is driving better efficiencies. That is going to be a great engine for future demand.

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

Roger Reed (Senior Analyst)

I appreciate that. I'll turn it back. Thank you.

Clay Williams (Chairman, President, and CEO)

Thanks, Roger.

Operator (participant)

Thank you. One moment for our next question. That will come from the line of Marc Bianchi with TD Cowen. Your line is open.

Marc Bianchi (Managing Director)

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

Clay Williams (Chairman, President, and CEO)

Yeah. First, Marc, let me qualify all of this as saying we're sort of guiding into the unknown, right? Since we had our last call in February, we've had some pretty rough economic news. We have this sort of emerging tariff trade situation that's come to the fore. We've had OPEC bringing back barrels. Incrementally down. I want to stress that our guide for the second half is more directional than it is precise. Yeah, I think, as I said earlier, I think these larger deep water sorts of projects are going to be more resilient, more insulated. Where we're going to see the greatest effect really is around the rig count-driven parts of our business, the quicker-turn sort of things that are tied to activity in the second half.

Marc Bianchi (Managing Director)

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

Rodney Reed (SVP and CFO)

Yes. Thanks, Marc. This is Rodney. As we mentioned, Q1, and as you saw, started out on a good note, free cash flow, $51 million, generally more cash consumptive in the first quarter. That was driven by good operational results, plus year-on-year improvement, working capital as a percentage of net working capital as a percent of revenue. As we look in Q2, generally throughout the year, we see some moderate improvement on the net working capital side. Last year, full year, we were 26.3%.

Obviously, as Clay mentioned, a lot of puts and takes out there. As we look at free cash flow conversion, as I mentioned earlier, still feel confident that we'll generate, convert 50% of our EBITDA into free cash flow. Throughout the year, that will continue to progress in that manner.

Marc Bianchi (Managing Director)

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

Rodney Reed (SVP and CFO)

Thanks, Marc.

Operator (participant)

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

Clay Williams (Chairman, President, and CEO)

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

Operator (participant)

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