NOV Inc. (NYSE:NOV) Q2 2024 Earnings Conference Call July 26, 2024 11:00 AM ET
Company Participants
Amie D’Ambrosio – Director, Investor Relations
Clay Williams – Chairman, President and CEO
Jose Bayardo – Senior Vice President and CFO
Conference Call Participants
Jim Rollyson – Raymond James
James West – Evercore
Arun Jayaram – JPMorgan
Marc Bianchi – TD Cowen
Luke Lemoine – Piper Sandler
Stephen Gengaro – Stifel
Operator
Good day and thank you for standing by. Welcome to Q2 NOV, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]
Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D’Ambrosio, Director of Investor Relations. Please go ahead.
Amie D’Ambrosio
Welcome, everyone, to NOV’s second 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 second quarter of 2024, NOV reported revenues of $2.22 billion and a net income of $226 million or $0.57 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
Thank you, Amie. NOV’s second quarter revenues of $2.2 billion increased 6% compared to the second quarter of 2023. As year-over-year double-digit growth in international markets and 6% growth in the offshore easily overcame a modest 1% decline in North American sales.
The company posted fully diluted GAAP earnings for the second quarter of $0.57 per share, up $0.18 year-over-year, helped by gains from our divestiture of our Pole Products business during the quarter.
Second quarter EBITDA improved 15% year-over-year to $281 million. Strong sequential EBITDA leverage of 66% was driven by the impact of cost reductions undertaken over the past several months, along with a pull-forward of some work and very good execution. Consolidated EBITDA margin of 12.7% improved sequentially and year-over-year due to the cost savings and rising margins in NOV’s revenue out of backlog, which accounted for about 25% of our revenue mix during the second quarter.
Exploration in new offshore basins, greenfield and brownfield offshore development for both oil and gas, and international development of unconventional resources are emerging as the primary growth drivers for NOV, as the strength and duration of this cycle remains on display. Stable oil prices and strong long-term outlook for natural gas and LNG demand are supporting E&P investments in these.
In fact, industry forecasts are calling for several additional final investment decisions, or FIDs, for big offshore projects following the significant ramp of the past three years, which are expected to drive sharply higher demand for offshore production assets like FPSOs. National oil companies or NOCs, have been clear about their higher spending plans to achieve ambitious goals to boost production.
These trends have important implications for NOV’s business. For international land developments, E&P operators need better drilling, stimulation, and production equipment and technologies, like those developed and honed in North America’s unconventional shale laboratory through the past two decades.
As a reminder, the U.S. shale revolution began with a retooling of its drilling fleet to AC power and high-spec capabilities early in the century. That was step one, followed by the build-out of substantially more and more efficient hydraulic fracturing equipment, two things that never happened across the Middle East, Asia-Pacific or Latin America. New international wells also need miles of corrosion-resistant flowline, plus chokes, valves, processing equipment and the like. NOV is a leading global provider of all of these.
Offshore E&P operators need drilling rigs to be reactivated after long periods of inactivity, which accelerates the corrosion caused by salt air and these also need to be retrofitted with drill pipe bits and drilling tools. Our organization supports the majority of the global offshore drilling fleet as a leading drilling equipment OEM. Drilling rig reactivation activity has been strong over the past few quarters as we’ve worked to put assets back to work.
Offshore operators also need platforms and FPSOs and subsea flowlines and production kit, ranging from flexible and composite piping systems to gas treatment pumps, valves and chokes. Again, NOV is a leading global provider of these and we are now also seeing rising demand for production technologies we provide, which drove the strong level of orders this quarter. NOV’s opportunity per FPSO production vessel ranges from $100 million in benign waters up to $700 million in harsh environments.
Book-to-bill was nearly 180% in the second quarter. Driven by strong demand for flexible pipe for deepwater FPSO developments, bookings were also held by demand for well intervention equipment for both offshore and international markets, and a large order for wind towers that Jose will speak to later.
Onshore tendering and drilling activity continues to be strong in the Middle East and is rising in Latin America and Asia as NOCs pursue aspirational production targets, particularly around gas, and employ unconventional production technology, many for the first time.
Most of these customers understand that the economics of unconventional technology work best with modern AC-powered rigs supported by advanced control systems, with downhole bits and friction reduction tools that enable longer laterals and higher production per well and with safe and efficient pressure pumping spreads and cooled tubing units that derisk completions.
They understand the fluid handling and corrosion challenges of high flowback rates of fluids carrying heavy abrasive loads through their processing plants. They understand that NOV can help them navigate these challenges with our unconventional production technology that enables profitable development of their resources. NOV is well positioned to capitalize on the building offshore and international momentum.
On the other hand, in North America, we see a different and more challenging picture through the second half of 2024. Onshore activity in the U.S. continues to slow due to E&P merger integrations and low natural gas prices. As the market awaits more LNG export takeaway capacity slated for 2025.
Low natural gas prices and NGL prices, particularly in West Texas, reduce the realized wellhead revenues for operators and diminish their cash flows, their wellbore construction economics, and their appetite to drill. Certain of our North American oilfield service customers are facing more price pressure as fleet utilizations fall, and most are increasingly cautious about their purchases, which led to an 8% decline in Energy Equipment revenues for the region year-over-year and drove North American mix down to 25% of segment revenue in the second quarter of 2024.
In Energy Products and Services, with 51% of its mix from North America, you’d expect an even bigger impact from this trend. However, with market share gains in North America rising from new products and technologies along with revenues from our first quarter acquisition of Extract, North America revenues for our Energy Products and Services segment were actually up 3% year-on-year.
So to sum it up, we’re very pleased with bookings during the quarter and 129% book-to-bill through the first half. While we are increasingly cautious about continued headwinds in North America, we think continued rising demand in offshore and international space will yield a book-to-bill greater than 1 for the second half of 2024. As they typically are, though, orders will continue to be lumpy quarter-to-quarter and we do not expect a repeat of the second quarter’s barn burner bookings again in Q3.
Turning to cost savings, to-date we have substantially achieved the $75 million annualized cost reduction initiatives we announced last year through our new segment structure, our workforce reductions and our facilities closures. But we recognize we are facing a more challenging market in North America, and to achieve acceptable returns on capital, we can’t stop here. So we’re developing additional opportunities to further reduce costs and drive better efficiencies, focusing on what we can control.
As always, that includes keeping an eye out for emerging technologies that we can bring to bear in our own operations, as well as our customers, technologies like AI, artificial intelligence. For the past few years, we’ve helped our customers optimize their drilling with AI through our KAIZEN app and we’ve used AI to help write code here for a number of new NOV software products.
More recently, we’ve begun to apply it to our own operations across more than 50 of our manufacturing facilities globally using a proprietary AI platform we call Iridia [ph] that we’ve developed internally to optimize capacity, improve machine tool utilization and drive better absorption and efficiency.
The platform leverages NOV’s proprietary Max Edge devices to collect real-time data from sensors affixed to manufacturing machinery in our plants. The platform then feeds that data to AI prescriptive models that identify opportunity costs caused by throughput, quality or reliability issues. These models remove the guesswork to allow our operations team to quickly respond to issues and opportunities.
The platform is highly scalable, and we plan to connect all our manufacturing machines worldwide beyond the several hundred that are using it today to help us improve utilization and results. NOV’s ability to quickly scale our operations as cycles dictate is a competitive strength that this system will enhance.
We are also using AI to drive better forecasting. The supply chain drama arising from the COVID pandemic highlighted shortcomings in our lead time estimation and planning. In response, we are developing an AI solution to more accurately predict and manage vendor lead times to ensure we have inventory on hand when and where we need it. This will further optimize working capital while maintaining high reliability and logistical efficiency.
We think steadily rising market demand in key offshore and international markets dormant for a decade plus, together with these technology-driven operating efficiency initiatives, new products and technologies we are bringing to the market, and further cost improvements are the prominent features that will guide NOV’s journey to better margins and returns. Our company is very well positioned to support and enhance our customers’ operations to drive better efficiency, to reduce emissions, to improve their safety for the next several years.
Before I turn the call over to Jose, I want to take a moment to thank our employees who may be listening this morning. As I just noted, we have a big opportunity in front of us as our offshore and international customers get back to work and as our North American customers continue to look to us for solutions to improve their business. They’re counting on us to deliver and I appreciate your hard work and creativity to support them. Thank you for the great job that you do. Jose?
Jose Bayardo
Thank you, Clay. NOV has consolidated the EBITDA and improved 15% year-over-year to $281 million, with margins improving 100 basis points to 12.7% of sales, reaching the highest level since 2015, supported by our $75 million cost-out program, which, as Clay mentioned, was substantially completed during the second quarter.
Cash flow from operations was a healthy $432 million due to improvements in working capital and profitability. CapEx totaled $82 million, leading to free cash flow of $350 million and we continue to expect that we will convert over 50% of EBITDA to free cash flow for the year. Much improved cash flow realized in the second quarter reinforces our already strong confidence that NOV’s capital-light business model will generate substantial amounts of free cash flow over the coming years.
Last quarter, we unveiled our return of capital framework that is aligned with our longstanding capital allocation priorities. As a reminder, priority one is to defend the balance sheet. As expected, during the second quarter, our net debt-to-EBITDA leverage ratio fell below 1 and our gross debt leverage ratio remained below 2, meaning we now consider the balance sheet to be an optimal condition, which paves the way to return a large portion of our future cash generation to shareholders while maintaining adequate financial flexibility.
Second, we aim to properly maintain our asset base and invest in organic growth opportunities that drive superior risk-adjusted returns. During the second quarter, the bulk of our $82 million in capital expenditures was invested in building out our ability to support more of our customers with our latest efficiency-enhancing tools, technologies and services.
Next, we always want to remain opportunistic regarding acquisitions and can accelerate strategic growth initiatives at attractive returns. In the second quarter, we completed our acquisition of Keystone Tower Systems, which I’ll talk more about in a moment, and we’re continuing to evaluate rifle-shot technology acquisitions that improve our strategic positioning.
Lastly, we remain committed to returning at least 50% of our excess free cash flow, defined as cash flow from operations, less capital expenditures and other investments to our shareholders on an annual basis. During the quarter, we stepped up our return of capital by increasing our dividend 50%, which amounted to $30 million paid in the quarter. We also bought back 2 million shares at an average price of $18.50 per share, totaling an additional $37 million. In sum, we returned $67 million of capital to our shareholders during the second quarter.
As I just mentioned, during the quarter, we completed the acquisition of the remaining minority interest in Keystone Tower Systems. With NOV’s help, Keystone developed a proprietary spiral welding manufacturing technology that we think will be a game-changer in the wind industry due to not only its potential to reduce the cost and time to manufacture wind towers, but even more so due to its potential to enable the manufacturing of towers in the field. This avoids the logistical challenges that prevent land wind farms from using taller towers, which can access stronger, more steady winds and utilize larger turbines.
Using taller towers can significantly improve the economics of wind power and therefore expand the geographical areas where you can cost-effectively produce wind power outside of the wind belt and into regions with higher populations and energy demand.
We made our initial investment in Keystone during 2019 and increased our financial investment over time, becoming the majority shareholder in 2023. We also increased our investment with human Capital over time by sharing our manufacturing expertise to help produce and sell Keystone’s first commercial tower sections and position the operation to be able to win a contract for 398-meter-tall wind towers from a major wind turbine, OEM.
With this win, we elected to exercise an option to buy out the remaining minority shareholders and we are now working to significantly expand Keystone’s manufacturing capacity to begin making deliveries on this contract beginning mid-2025. This operation is really just getting started, but we’re excited about the long-term potential of this business.
Moving on to our segment results. Our Energy Products and Services segment generated revenues of $1.050 billion in the second quarter, a 2% increase compared to the second quarter of 2023.
EBITDA decreased $14 million to $184 million year-over-year or 17.5% of sales, due to a less favorable sales mix and a more challenging North American market. Sequentially, the segment realized 3% growth with 30% EBITDA flow-through.
As a reminder, our Energy Products and Services segment generates income from three revenue streams, services and rentals, consumable products and sales of shorter-lived capital equipment. The segment sales mix for the quarter was 48% service and rentals, 20% product sales and 32% capital equipment sales.
Revenue from service and rentals includes tubular coating and inspection services, solid control services, drilling data acquisition, analytics, and optimization services, and rentals of our downhole drilling tools, drill bits, and artificial lift equipment.
During the second quarter, revenue from NOV service and rental businesses increased in the low-single digits’ year-over-year. With market share gains in the U.S., strong demand from international markets and the contribution from our new artificial lift business more than offsetting the 12% decline in North American drilling activity. Excluding the contribution from our artificial lift business, revenues from service and rentals declined in the low-single digits’ year-over-year.
Revenue from drill bit rentals in the U.S. held flat from the second quarter of 2023, despite the 17% decline in the U.S. rig count. We realized strong growth in the Permian Basin from the rapid adoption of our latest bit and cutter designs, which coincided with many operators re-evaluating performance, bit designs and vendors as they optimize hole sizes across much of the basin.
Growth in the Permian offset declines in other areas of the U.S., resulting from lower activity in gas basins and the cooling effect consolidation among oil and gas producers continues to have on activity. Internationally, bit rentals and borehole enlargement services improved slightly on increasing activity in the Middle East, more than offsetting lower activity in Latin America.
Revenue from downhole tool rentals improved 3% from the second quarter of 2023. We realized a low- to mid-single-digit decline in North America against a rig count that decreased 12%, a result of rapidly growing adoption of our latest drilling technologies that allow operators to more efficiently drill high-pressure and long lateral wells. Demand for our tools is generally driven by footage drilled, but higher levels of drilling complexity require more of our technologies for efficient operations.
For example, as customers push beyond 2-mile laterals, they’re realizing the benefit of running multiple zero-pressure drop agitators in their bottom-hole assembly. And for wells drilled with rotary steerable tools, our PosiTrack torsional vibration mitigation tool enables operators to maintain higher weight on bit, allowing them to drill further without damaging the BHA.
While international revenue from downhole rentals was mostly flat year-over-year, we expect to realize strong growth over the mid- to long-term, driven by increasing activity in the unconventional plays of the Middle East.
Revenue from solid control services realized a low single-digit growth rate compared to the second quarter of 2023. In North America, rapid adoption of NOV’s new Alpha shale shaker, which offers significantly higher cuttings handling capacities, greater safety and lower costs, mostly offset meaningfully lower drilling activity in North America.
Revenues from the Eastern Hemisphere improved on higher activity levels and increasing adoption of new technologies, including the Alpha shaker and our iNOVaTHERM Waste Treatment System, which efficiently treats oil-based drilling waste at the wellsite, allowing customers to eliminate the costly transport costs while meeting all environmental requirements for disposal.
Revenues from rentals of our drilling data acquisition systems improved year-over-year, with a low single-digit decline in North America being more than offset by improved activity in the Eastern Hemisphere.
Our Downhole Broadband Solutions wired drill pipe services operation is gearing up for a big 2025. Sequential revenues were mostly flat, but profitability declined, with the operation beginning to carry additional costs as it readies itself for significant growth.
As noted in our significant achievements, we signed a framework agreement with a major Norwegian oil and gas producer associated with their intent to deploy our services across their rigged fleet.
We also recently had two additional significant customer wins with our DBS offering. After completing a drilling campaign months ahead of schedule and with better well placement than the customer expected, leading to improved productivity, an operator extended its contracts with us for another two years.
And earlier this week, after realizing strong results from a trial with our DBS services, a major NOC in the Middle East awarded us contracts for one offshore and one land rig to begin operations at the end of the year.
Lastly, our Tuboscope operations experienced a low- to-mid single-digit decline in revenues on lower demand for inspections of oilfield tubulars and for drill pipe coating in the U.S.
Revenue from product sales, which include consumable products used in drilling and completion operations, improved in the mid to low 20% range year-over-year and excluding the acquisition of our artificial lift business was up low single digits. The small year-over-year increase was primarily the result of higher product sales in the Eastern Hemisphere from our Tuboscope operations, including our pipe connection systems and sleeves and bulk powder coating shipments. A low 20% increase in sales of completion tools with significant gains in the Middle East, North Sea and North America, and an increase of bulk drill bit sales into Africa and Asia. These increases were partially offset by lower sales of fishing tools and components for managed pressure drilling equipment.
Sales of capital equipment within the segment, including composite pipe and tanks, drill pipe, conductor pipe, shell shakers and managed pressure drilling equipment fell in the low-to-mid single digits compared to the prior year, due primarily to lower drill pipe sales, which declined in low 20% range due to a sharp falloff in demand from U.S. land markets, partially offset by improving demand from international land markets.
The decline in our drill pipe business was more than offset by higher deliveries of MPD equipment and a modest improvement in sales of fiberglass equipment, where there’s growing demand from composite pipe in the oil and gas fields of the Middle East, and for corrosion resistant composite tubulars and tanks for use in FPSOs. Bookings for our fiberglass business increased 25% sequentially and include orders for 462 kilometers of fiber spar spoolable pipe and 128 kilometers of bond strand pipe destined for the Middle East.
For the third quarter, we expect revenues for our Energy Products and Services segment to be flat to up in the low single-digit percent range when compared to the third quarter of 2023, with EBITDA between $175 million and $190 million.
Our Energy Equipment segment generated revenues of $1.204 billion in the second quarter of 2024, an $87 million or 8% increase year-over-year compared to the second quarter of 2023. EBITDA improved $43 million to $142 million or 11.8% of sales, representing an incremental flow through of 49%. The outsized incremental margin was a result of cost savings, the improving quality of our backlog and a more favorable sales mix.
Double-digit revenue growth from both international land and offshore markets more than offset a slight decline in sales into the North American land market year-over-year. Normalizing for the divestiture of the segment’s Pole Products business, revenue increased roughly 10% year-over-year.
As a reminder, this segment is primarily a later cycle capital equipment business that has two revenue streams, equipment sales and aftermarket sales and services. During the second quarter, equipment sales accounted for approximately 54% of the segment’s revenues. Aftermarket sales and service accounted for the remaining 46%.
Segment’s capital equipment sales increased in the mid-single-digit percent range or roughly 10% when normalized for the divestiture of our Pole Products business and aftermarket revenue improved in the upper single digits relative to the second quarter of 2023. Most of our aftermarket revenue comes from our large installed base of drilling equipment and Intervention & Stimulation Equipment.
Our rig equipment business saw a high-teens percent increase in its aftermarket revenue year-over-year, led by higher spare parts sales and a significant increase in projects to reactivate, recertify and upgrade offshore rigs.
As offshore rigs have gone back to work and idle rigs that could have been cannibalized for parts have diminished, excess inventories of spare parts have been depleted by our customers and their fleets of active rigs are now providing steady demand for spare parts, recertifications and special purpose survey work, which are typically done once every five years. And as the global fleet ages, recertifications are requiring more parts and services, leading to strong aftermarket demand for NOV at the leading OEM in the space.
In addition to traditional aftermarket spares and service, we’re building a steady stream of recurring revenues from subscription services that include support from our 24×7 remote support center, which is currently monitoring 244 offshore rigs, regular updates and support from our NOVOS multi-machine control and process automation systems, where we currently have 125 systems deployed, 26 being installed and another 63 in our backlog. And support for our recently introduced robotic systems that has been rapid adoption during the second quarter, including new orders for another 10 systems from eight different drilling contractors.
Our Intervention & Stimulation Equipment units’ aftermarket revenues were down in the low-teens year-over-year due to declines in North American activity. While we may not have quite reached the bottom in demand for aftermarket parts and services in the North American completions market, demand from international markets continues to improve and should begin to more than offset sluggish demand in North America.
Moving to the capital equipment side of the business, as we mentioned in our last call, we had a significant order slip from Q1 into Q2, which contributed to a very strong level of orders and a book-to-bill of 177% during the second quarter. Book-to-bill for the first half of 2024 was 129%. Orders for large pieces of capital equipment are inherently lumpy, so we don’t get too excited about bookings in any individual quarter, but instead focus on what our customers are telling us related to their upcoming needs. And what we’re hearing from them suggests that we can expect bookings to remain solid in the second half of the year.
During the second quarter, we posted a significant year-over-year improvement in sales of drilling equipment. Land deliveries increased on improved progress on Saudi newbuilds and a sizable increase in top drive and iron roughneck deliveries.
Offshore capital sales growth has been driven by pull-through from rig reactivations and a general uptick in automation upgrades. Offshore activity remains strong and we expect continued reactivations and recertifications from the aging fleet to drive upgrades that will require meaningful capital equipment orders.
Revenue for Marine and Construction business posted a slight decline compared to the second quarter of 2023, with higher revenues from cableway vessels and electric cranes not quite offsetting lower revenues from wind turbine installation vessels. Orders were solid for offshore wind and construction business, and we booked a repeat order for our NG-20000 WTIV design and jacking system for Europe’s largest installation vessel owner in the offshore wind space. Despite delayed FIDs and inflationary impact on developers’ projects, the outlook for orders of WTIVs, cableway vessels and heavy lift equipment for FPSOs and offshore construction vessels remains promising, with the possibility of one to two more vessels in the second half of the year.
Capital equipment sales by our Intervention & Stimulation Equipment business improved almost 10% compared to the second quarter of 2023. Solid execution from the business unit’s growing backlog of wireline equipment and higher shipments of coil tubing equipment more than offset only slightly lower shipments of pressure pumping equipment.
Despite soft demand from North America, the business posted its fourth straight quarter with a book-to-bill better than 1 on continued strength and demand for wireline and coil tubing equipment from international markets.
Our process systems operation achieved a low single-digit revenue increase year-over-year resulting from the strong execution on a large processing module for the North Sea. We expect a modest step down in revenues from this operation in the third quarter, but longer term, the outlook for this operation is bright and we’re seeing growing demand for new monoethylene glycol units, which are sizable, higher margin FPSO modules where our process systems team provides unmatched capabilities and experience.
Our Production and Midstream business saw mid-teen percentage improvement in revenue compared to the second quarter of 2023 with a large increase in shipments of production chokes in the Middle East outweighing softer demand for chokes and pumps in North America.
Lastly, our subsea flexible pipe business unit continued to capitalize on robust demand for subsea flexible pipe. The business has increased its backlog by more than 80% over the last year, achieving an all-time high and providing a clear path to significant topline growth with much improved margins beginning in 2025.
Awareness of limited remaining industry production capacity is driving operators to place orders further in advance, creating a positive outlook for additional orders, some of which are now for delivery stretching into 2027.
For the third quarter, we expect revenues for our Energy Equipment segment to be flat to up a couple% compared to the third quarter of 2023, with EBITDA between $140 million and $160 million.
With that, we’ll now open the call to questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Jim Rollyson from Raymond James.
Jim Rollyson
Hey. Good morning, Clay and Jose.
Clay Williams
Good morning, Jim.
Jose Bayardo
Good morning, Jim.
Jim Rollyson
Obviously, pretty solid results and fantastic bookings, which I guess, we kind of expected some — and benefit from the slippage. But, Clay, maybe you replaced more than 20% of your backlog in a quarter from new bookings, and obviously, we’ve been on this trajectory through conversation and results of margins embedded in backlog getting better. If I did the math correctly, you gave 3Q guidance, and if you kind of back into 4Q from the annual guidance, your EBITDA margins are moving into the 14%-plus range in 4Q. So, just maybe some color around that margin trajectory in backlog and kind of how backlog pricing is even trending in real time?
Clay Williams
Yeah. And as we’ve discussed before, Jim, at the bottom of the pandemic, we ended up with some frame agreements that weren’t as inflation-protected as we’d hoped and had more difficult payment terms and the like during a pretty soft time and those are — we continue to deliver on those, but they’re becoming less and less of our revenue stream quarter-by-quarter, and we’re bringing in new work as we did this quarter that’s at much better terms and margins.
And so, I’m very pleased to see that happen. And as Jose said, as we get into 2025 in particular, there’s a big one– couple big ones that will dissipate and should help prompt additional margin expansion as we move through 2025 in a big way.
So, yeah, we have been — more broadly, we’ve been very focused on margins here. The $75 million cost out is certainly helping improvement of our — and by the way, we have more to come.
We’re not going to quantify that for you, but we’ve got a bunch of new leaders here coming out of our reorganization, and they’re looking at new ways to improve margins, very focused on locations that are underperforming actually with respect to return on capital for which margin is kind of a proxy, but I think that will help drive better margins in the future. So, yeah, our outlook is pretty strong.
With respect to exit margins in Q4, yeah, I think right around that 14% range is kind of what we’re looking at at this point and so — and expectation is that we set aside the seasonality. Q4 is usually our best quarter with respect to margin, that the company should see an upward trend on margins for the next few years given the strengths that we see in offshore and international.
Jim Rollyson
Got it. That’s helpful. Then kind of an interesting question that you prompted me with the slide. Just on the FPSO side, so if you believe some of the forecast, like Rystad has almost 50 incremental FPSOs in the next five years, and you’re talking about revenue opportunity of between $100 million and $700 million per FPSO depending on the size, scale, how far offshore, et cetera. But curious what your typical win rate is and I mean, that, those are pretty — potentially pretty big numbers just in one small segment of what you do. So, just curious your view on that?
Clay Williams
Well, yeah, each one of these is a competitive bidding situation, but we usually come into those with a really strong portfolio of technology. The biggest portions of that are around process systems, gas dehydration, seawater treatment processes, a lot of experience with a global leader in that area and modules that go into FPSOs to handle those fluids.
We sell a lot of composite piping systems into those FPSOs for seawater fire suppression systems, for ballast systems and have a really strong market position with that. That’s in addition to cranes, to turret mooring systems, to offloading systems. Another very big piece of that is our position in subsea flexible pipe and that’s — the company has a very strong reputation there. So, it’s several very strong business franchises that sell into that trend.
And what I would tell you, though is, also too with respect to our participation in FPSOs is that, our wins on purchase orders is a little later than others out there in the space in that it’s more product-driven. And so, a lot of times, we won’t necessarily land purchase orders related to FPSOs until six months, 12 months, 18 months after FID, for instance.
But what our customers are seeing now, particularly in the flexible pipe space, is very high utilizations of manufacturing plants, not just ours, but others around the world as well. So, that’s becoming an earlier item. They’re going to have to think through in their development project planning a little bit earlier in the process.
Jim Rollyson
Excellent. Appreciate it. I’ll turn it back.
Clay Williams
You bet.
Jose Bayardo
Thanks, Jim.
Operator
Thank you. Our next question comes from the line of James West from Evercore.
James West
Hey. Good morning, Clay, Jose?
Clay Williams
Good morning, James.
Jose Bayardo
Good morning.
James West
Guys, I had a question on land rigs, both domestic U.S. land rigs and then the fleet that’s being retooled and built for the international markets. So, I’m hearing a bit about some upgrades here and there in the U.S. Some of that’s software, of course, but there’s equipment upgrades and some changes to the rigs, and of course, there’s a total retooling of the fleet internationally. I wondered if you could, I know this is a pretty broad question, but if you could maybe bucket what are the leading kind of upgrades or changes or equipment asks on these new either upgraded rigs or the new rigs?
Clay Williams
Well, that’s a great question, James. As you know, the appetite to spend a lot of capital is pretty limited by…
James West
Yeah.
Clay Williams
… North American land drillers and access to capital, cost of capital, that’s a factor in their level of appetite for new technologies. We sort of recognized this several years ago. So, our development focus around new technologies focused on land drilling have been around bike-sized ways to achieve a rig of the future type performance level with a reasonable sticker cost, if that makes sense.
And we also recognized that digital technologies were going to be a big part of that and so that’s why we introduced our NOVOS operating system to support our rigs, which really opens up their operations to a lot of applications, some developed by NOV, some developed by others in a way that can really drive efficiency. So, I’ve been seeing a really good uptake on NOVOS. I think Jose quoted some really good numbers in a prepared remarks earlier about installed base.
And what’s interesting about that, James, is that that provides a digital foundation for automation. So the other thing we’ve done is develop a very cost-effective way to bring robots to the rig floor and to the racking board and to really create truly a hands-free environment and a lot of buzz in the industry around that capability. And I would add, not just amongst drilling contractors who are excited about it because it helps them manage their workforce and creates higher levels of efficiency, but also amongst operators.
And that’s really what we’re behind the scenes, who we’re really seeing drive demand for this. So, there’s a couple of major IOCs out there that have latched onto this technology and are talking to their drilling contractors about putting it to work, and that’s both land and offshore, I would add and so excited about that. That’s — and so that’s, I think, kind of shaping what we see in North America around demand for technologies to improve drilling.
If you go overseas, as I said in my prepared remarks, it’s interesting. The big rebuild of North American rig fleet that happened to move to AC technologies, quick move, fit for purpose, higher setback, higher mud pressure type rebuild, that never really happened in most international locations.
James West
Right.
Clay Williams
So, what we’re seeing now is NOC and operator preference for AC-powered rigs, some of these technologies that I mentioned, and that’s driving demand for those kinds of rigs in those marketplaces, most notably around the Middle East, but also interest in Latin America and a few other places.
James West
Got it. That’s very helpful. And then, maybe a follow-up on the Keystone acquisition. We’ve obviously been watching your interest and your — and the growth of that business, but it seems like you’re hitting a real clear milestone here and that, of course, led to the fully rolling the business in. I’m curious, the — who are you replacing? What’s the competition? Who are the incumbents? And is there any technology like yours, like this spooling technology in the market?
Jose Bayardo
Yeah. Great question, James. And so, yeah, the — obviously, there’s an instilled base of incumbents that have provided traditional wind towers, both land and offshore markets. And it’s a slow, heavy fabrication process that’s typically used. Design is not optimal in terms of what they’re delivering into the marketplace.
And so, what you — you’ve known us for a long time and our mission in life is to increase the efficiencies associated with the production of energy around the world. And we saw that there are better ways to do things in the renewable space. The renewable space was clearly in need of a lot of time and attention in terms of driving improved economics.
Obviously, before us, the industry had done a great job bringing down costs through more standardized manufacturing processes and getting towers taller and going to bigger turbines. They were hitting a wall and our brilliant scientists and engineers put their hats on and tried to identify ways to further drive the improvement in economics.
And while we were working on our own solutions, we came across this really smart group of individuals that had designed this technology, the spiral weld technology that not only allows you to manufacture wind turbine towers at a faster rate, but also using less steel so lower cost, faster production.
And what we really got excited about was the longer term potential of building these plants in fields where you can more optimally design these tower sections. So, traditional wind tower that’s built right now to overcome the logistics of getting up and down the highway, even for the tower heights they’re building today, the bottom portion of the tower is using much thicker steel than you should. Ideally, you would have wider base with thinner steel would be much more efficient, plus you could go to much taller heights.
If you build the tower sections in the field and assemble in the field, you can overcome that issue, have an optimally designed tower and go to much higher heights and utilize bigger turbines, bigger blades, drive much better economics.
So, obviously, our first foray here is to prove out the technology, which we’ve done. We have sold commercial sections out of our plant, our fixed plant in Pampa, Texas. We’re working really hard to scale up those operations to begin making deliveries under this new contract in mid-2025. And then we’ll see where the business takes us, but as I mentioned, we’re really excited about those infield manufacturing plants that will come at some point in the future.
James West
Great. Fascinating. Thanks, guys.
Clay Williams
You bet. Thanks, James.
Operator
Thank you. Our next question comes from the line of Arun Jayaram from JPMorgan.
Arun Jayaram
Yeah. Good morning. Clay, I wondered if you can kind of …
Clay Williams
Good morning.
Arun Jayaram
Good morning. Clay, I was wondering if you could elaborate on some of the tailwinds from the organizational wide re-segmentation. You talked about some new leaders. You’ve gone to two segments from three.
Clay Williams
Yeah.
Arun Jayaram
And maybe just an update on where we’re at with the $75 million cost-out and so maybe — you signaled maybe there’s more to come on that front?
Clay Williams
Yeah. Thanks, Arun. Yeah. So, as you know, I think, it was about this time last year we announced a cost-out program, $75 million. That follows a couple other larger ones that we executed prior that involved that re-segmentation and reorganization.
We ended up with a bunch of new business unit leaders here and had some terrific long-serving employees retire and leave us, but a lot of fresh faces and fresh perspectives and new eyes on opportunities. So, we continue to execute that plan that was developed under the prior regime, if you will.
But now as we are — here we are in the middle of 2024 and they’re coming up with additional opportunities. So, some specifics around that would include things like more centralized manufacturing organizations and some re-engineering opportunities on supply chain, folding in some of these new technologies like I talked about in the prepared remarks, utilizing AI to monitor our machine tools, for instance.
And it also involves a process that we’re going through with these new leaders to take a fresh look at all of our locations and operations around the world and analyze these from a return on capital standpoint. And so I think there will be continued rationalization.
And so that’s underway. It will continue a while. And as you know, probably, better than most, we’ve been doing a lot of rationalization and a lot of cost reductions here for really the past decade.
And so, a lot of the easy things have been done. These are all higher degree of difficulty type things, but I think we’re going to continue to get better and more efficient. That’s going to, as I said, be a bit of a tailwind on margins going forward.
Arun Jayaram
Great. My follow-up is I’m wondering, Clay, if you could comment on what you’re seeing in terms of the rig reactivations, recertifications kind of process, and maybe you could touch on the potential impact to NOV from some of the offshore rig consolidation activity we’ve seen more recently?
Clay Williams
Yeah. I think — yeah, we saw a pretty good ramp on rig reactivations from 2022 into 2023. It continues to grow. And it’s a combination of bringing in our engineers to survey the rigs, figure out what they need to do the special purpose survey work that’s required typically every five years for those rigs and in many cases to replace equipment, upgrade equipment.
It’s kind of an opportunity. Those rigs go into a shipyard to get everything done that they need to get done and they’re suffering kind of the opportunity cost of not drilling during that time. And so that’s been a good tailwind to our business.
What we’re seeing in that process is that, the industry is very rational and so the first rigs to go back to work are the cheapest and easiest to reactivate that will do the job. And as the industry looks to put more and more rigs back to work, the cost per rig is going up. And so we certainly benefited from that and we continue to.
What I would tell you is, despite the fact that we’re very busy, there’s a lot of I think we’re 30-something rigs in shipyards now that are getting reactivated, there’s still a lot that could be. And so there are, I think, seven floaters out there that were being constructed and the construction operations were suspended in the downturn through the past decade, plus another 25 that are cold stack, and then, sorry, 14 floaters and then seven jackups that were being constructed that were suspended, and another 39 that were cold stack. Those are all potentially rigs that could be reactivated that we could benefit from.
Now, to be completely candid, probably lots of those, it’s not cost-effective to reactivate them and parties needing a rig might look at newbuild at some point along the way, but there’s still opportunity for that to grow and we’re delighted to be helping our customers make that happen.
With respect to the consolidation in the offshore, we know all parties and all parties have NOV equipment, and I don’t — I am not — I don’t think ownership of that equipment is going to drive the needle one direction or the other, quite frankly. We’ve got great relationships and strong relationships with our very near and dear friends in the offshore drilling space, and look forward to continuing to support their operations and drive better efficiency through their operations.
Arun Jayaram
Thanks, Clay.
Clay Williams
You bet. Thanks, Arun.
Operator
Thank you. Our next question comes from the line of Marc Bianchi from TD Cowen.
Marc Bianchi
Hey. Thanks. I’d like to start by following up on AJ’s question there about the aftermarket services. One of the things that I think has been a …
Clay Williams
Okay.
Marc Bianchi
Thanks. I think one of the things that I think has been a big benefit over the past couple of years is the special survey work, which I think, if we sort of map out when these rigs were delivered, would suggest maybe there’s a challenging comp when you get to 2025. Can you talk about that a little bit? Like, is there a slug of revenue that goes away in 2025 and we could see maybe the aftermarket service have a little bit of a headwind related to that?
Clay Williams
With respect to the special purpose survey portion of that, Marc, we don’t really see it, and the reason for that is there have been sort of multiple generations of offshore rigs delivered. There were a lot of — that’s kind of — it’s coming out of the super cycle, let’s say, 2008, 2009, 2010, around the deliveries and then again in 2011, 2012, 2013, and then when the music stopped, let’s say at the end of 2014, a lot of construction projects underway around the world and rigs continue to be delivered and those have kind of been spread out over time, but also, too, these rigs have to come in every five years, and what I would tell you is the 10-year SPS for a rig typically is a bigger ticket item than the five-year SPS, and the 15-year SPS is typically a bigger ticket than the 10-year SPS, if that makes sense.
And so that sort of diversity of, let’s call them birthdays, plus the fact that some rigs have been interrupted from COVID and other downturns in the industry, let’s say, plus the fact that not all SPSs are kind of equal opportunity for NOV kind of levels that out more. The key driver for us is the fact that the offshore fleet broadly is going back to work, and the offshore fleet broadly has already cannibalized everything they can cannibalize. And so a healthier level of activity and not having to compete with an overhang of excess supply of spare parts and equipment that can be repurposed is the main driver for NOV’s business. Does that make sense?
Marc Bianchi
No. It makes perfect sense and I hope that my birthday parties that I’m paying for over the next few years don’t go up and up and up, but we’ll see.
Clay Williams
You’re not getting older, you’re getting better.
Marc Bianchi
No. I was referring to my kids. In terms of the order outlook here, so for…
Clay Williams
Yeah.
Marc Bianchi
I think I heard you say, Clay, in your prepared remarks, you’d expect greater than one book-to-bill in the second half, and I just want to make sure that that was what I caught, or were you referring to…
Clay Williams
Yes.
Marc Bianchi
… just a portion of the orders? Okay. And I think, Jose, you mentioned a couple of wind insulation vessels that are kind of in the pipeline and could be awarded. Do you need those to convert to greater than one book-to-bill or do you think you can get there without those one-offs?
Clay Williams
Well, they would help. There are paths to get there without that support, as we always do, and you’re well aware of this, Marc. But these things are big and lumpy, and so — and that’s part of the reason we’re hesitant to get a lot of order guidance, but I would tell you, there’s multiple ways to get to book-to-bill north of 1.
And as we always see in any quarter, six-month period, we land certain orders and we miss certain orders and so — but the general feel we’re getting from our operations people is the outlook is pretty good for the next couple of quarters on demand. And then longer term, our view on offshore is very constructive and international is very constructive, and so that’ll be the driver for future orders.
Marc Bianchi
Yeah. Super. Thank you very much. I’ll turn it back.
Clay Williams
You bet. Thanks, Marc.
Operator
Thank you. Our next question comes from the line of Luke Lemoine from Piper Sandler.
Luke Lemoine
Good morning, Clay.
Clay Williams
Good morning, Luke. We’re having a hard time hearing you. Oh, there you are. Good.
Luke Lemoine
Okay.
Clay Williams
Go ahead.
Jose Bayardo
Luke, good morning.
Luke Lemoine
Yeah. You had good orders here in 2Q in Energy Equipment, and you talked about book-to-bill being above 1x in the second half of the year, and I know it’s kind of early days, but just kind of a broader NOV, might be difficult to do without quantifying, but could you just help us kind of frame how you see 2025 shaking out in your broad outlook as of now?
Clay Williams
Yeah. We’re hesitant to quantify this beyond kind of thematically and directionally. We feel good that international and offshore, that that cycle in both areas is going to have some legs. NOV’s going to be a critical participant in that and so that’s going to carry us into a much better year in 2025, better margins, better demand.
To me, the wild card is North America, and there’s a lot of discussion out there about the potential impact of gas drilling returning to North America, higher LNG takeaway capacity that would help operators’ economics a lot and then the completion of integration activities between all of the E&Ps that are merging, and kind of getting back to work would help a lot.
But that’s — to me that’s the biggest wild card that we see out there right now is North America. But I think on the whole, I think the combination of offshore and international winds and dominates in that helps more than offsets any continued pressure we see here in North America. I don’t know if you’ve got anything to add to that, Jose.
Jose Bayardo
No. Maybe the only other thing I would add is, absolutely agree with everything that Clay just said. North America is the real wild card. Things continue to look really good from an international offshore standpoint. Obviously, the backlog has been representative of that.
But just to add a little bit more onto North America, I think that has a big potential effect with a small increase in activity we think can drive outsized demand for capital equipment in the North American marketplace.
So, hopefully, we’re near a bottom in terms of overall activity and we’re not — certainly not counting on a big uptick, but even a modest uptick into 2025, we think will drive additional demand for capital equipment.
And so, it sort of feels like there’s a big overhang of completion equipment that’s out there, but we would argue that things are tighter than they appear. We’re still delivering new frac units. And really that’s a result of how hard this equipment has been working out in the field and really the real limited capacity that really exists just from an age and usability standpoint.
So, again, at these levels, we’re not anticipating certainly heroic bookings for North America for completion equipment, but a little pickup absorbing the capacity that’s out there, and I think will cause a lot of demand for new equipment as a lot of the tired stuff just needs to be replaced going forward.
Luke Lemoine
Okay. Got it. Thanks much.
Clay Williams
Thanks, Luke. You bet.
Operator
Thank you. Our next question comes from the line of Stephen Gengaro from Stifel.
Stephen Gengaro
Thanks. Good morning, everybody.
Clay Williams
Hi, Stephen.
Stephen Gengaro
So, two quick ones from me. Just first on the cash flow side, obviously, free cash flow is strong in the quarter. Maybe for, Jose, when we think about the rest of the year and you kind of think about the journey you’ve been on recently to get to this point and the confidence level in free cash generation, how should we think about sort of just the key components of it over the next couple quarters? And I imagine your confidence level is clearly increasing here on cash generation over the next couple years?
Jose Bayardo
Yeah. Absolutely, Stephen. So, look, a couple of quarters ago we started to have really strong conviction that we had turned the quarter — turned the corner, and then for the next several years, we would start throwing off really meaningful levels of free cash flow, and that’s obviously what we’re able to demonstrate here in the second quarter into a smaller effect, frankly, back in Q4 of last year.
So we’re in a great place, but just like orders, free cash flow can be lumpy as well depending on the time of deliveries, on when we collect certain receivables, when we hit specific milestone payments.
And so, the guidance is still the same as it has been, which is that we will convert at least 50% of our EBITDA to free cash flow during the year. I think we got a little bit of a pull forward into Q2, so expect a decent step down into Q3, and then as usual, another strong free cash flow quarter in the fourth quarter.
And as we go forward beyond 2024, as I’ve said before, don’t see any reason why we shouldn’t continue to generate free cash flow at a rate that’s sort of equal to or better than that 50% of our EBITDA.
So I feel really great about things. Obviously, we’ve been working on working capital. There’s more opportunity on that front in terms of where the cash comes from, but also just obviously higher levels of profitability drive more free cash even without a material movement in our working capital balances. So things look really good from a free cash flow standpoint that will ultimately translate into what we return to our shareholders.
Stephen Gengaro
Great. No. That’s very helpful. And the other just quick question, just from a macro perspective, you talked a little bit about North America land and the uncertainty next year. In your view, and you guys have looked at this a long time, what do you think needs to happen? I mean, do you think it’s just the M&A kind of pause that’s creating some of the apprehension along with gas prices? Do you think there’s anything else at work which is kind of leading to maybe lower activity than at least we would have thought at this point of the year?
Clay Williams
That’s a really good question. Certainly gas would help a lot. I think gas has taken a big toll. Even liquids producers have exposure to gas prices and that’s affected activity here. Beyond that, in terms of what kind of lights up the North American rig count again now. I’m not sure I have a good guess as to what that might be other than to just point out the fact that this is a very, very creative and entrepreneurial group of producers here in North America and man, they always seem to come up with something.
And 20 years ago it looked like North America was continuing to drift down and had its best days were in the rear view mirror and then all of a sudden you have the shale revolution here. I don’t know what the next revolution looks like, but I can tell you there’s an awful lot of smart people in the E&P community focused on making that happen.
In terms of our — what would help us a lot is our customers here in North America have gotten really good at capital discipline and have really limited their expenditures on new technology. We’re continuing to try to figure out what’s next in that space, and as I mentioned earlier, I think higher levels of automation in drilling and there’s some IOC, some major oil company senior leaders who share that vision.
And so, I’m pretty excited about the opportunity in front of us to help lift the automation and the digital tools that are used to optimize drilling across rigs all across the U.S. and North America. And the drillers here, I’m sure they’re going to do it again this quarter, talk about improving efficiency and continue to get better at what they do, and so we’re looking for opportunities to help support them do that.
Stephen Gengaro
Excellent. Yeah. Thanks for the call.
Clay Williams
You bet. Thank you, Stephen.
Operator
Thank you. At this time, I would now like to turn the conference back over to Clay Williams for closing remarks.
Clay Williams
Thanks, Fiji. We appreciate everyone joining us this morning and we look forward to sharing our third quarter results with you in October. I hope you have a great day. Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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