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DATE
Tuesday, July 29, 2025 at 3:00 p.m. ET
CALL PARTICIPANTS
Chairman, President, and Chief Executive Officer — Clay Williams
Senior Vice President and Chief Financial Officer — Rodney Reed
Senior Vice President — Jose Bayardo
Vice President, Investor Relations and Corporate Communications — Amie Burnett
For analyst commentary, email [email protected]
RISKS
Aftermarket spare parts and consumable product sales declined due to softened oil and gas activity. This led to sequential margin compression across several businesses.
Macroeconomic uncertainty, the rapid unwinding of OPEC plus production quotas, and conflict in the Middle East have made customers more cautious. In North America, exploration and production
Tariff and inflation-driven cost pressures, including a June increase in section 232 steel tariffs from 25% to 50%, are increasing expenses and offsetting expected cost savings initiatives.
A sharp decline in spare parts bookings and reduced service utilization occurred in the drilling equipment business, especially impacting the aftermarket segment.
TAKEAWAYS
Revenue: $2.2 billion (GAAP) for fiscal Q2 2025 (period ended June 30, 2025), up 4% sequentially, but down 1% year over year.
Net Income: $108 million, or 29¢ per fully diluted share, on a U.S. GAAP basis.
Adjusted EBITDA: Adjusted EBITDA was $252 million, representing 11.5% of sales.
Energy Equipment Segment Revenue: $1.21 billion, essentially unchanged from the prior year; EBITDA grew $16 million to $158 million, and segment margin rose by 130 basis points to 13.1% for the Energy Equipment segment.
Energy Products and Services Segment Revenue: $1.03 billion, a 2% decrease year over year. Adjusted EBITDA declined $38 million to $146 million, or 14.2% of sales (adjusted EBITDA, non-GAAP).
Free Cash Flow: with 83% EBITDA-to-free-cash-flow conversion over the last twelve months.
Shareholder Returns: 10.9 million shares repurchased for $150 million. Cumulative buybacks since the 2024 launch total approximately 25 million shares.
Dividends: $0.75 per share base dividend and $0.21 per share supplemental dividend paid, totaling $135 million year to date.
Tariff Expense: $11 million incurred; projected to increase to $25 million–$30 million by fiscal Q4.
Cost Reductions: Over $100 million in annualized cost savings targeted by 2026 via business process changes, strategic sourcing, facility consolidations, and market exits.
Working Capital: Improved by about 300 basis points year over year in working capital as a percentage of revenue for fiscal Q3; full-year range expected at 27%–29% of sales.
Third-Quarter Guidance: Consolidated revenue for fiscal Q3 is expected to decline by 1%–3% year over year, with adjusted EBITDA projected between $230 million–$250 million for fiscal Q3.
Segment Guidance: Energy Products and Services revenue to be flat to down 2% and EBITDA $130 million–$150 million for fiscal Q3; Energy Equipment revenue to decline 1%–3% with EBITDA $145 million–$160 million for fiscal Q3.
Backlog: Process systems and subsea flexible pipe businesses combined booked $1.6 billion in orders over the last five quarters as reported for the period ending fiscal Q2 2025.
Book-to-Bill Ratios: Energy Equipment segment had a 66% book-to-bill in fiscal Q2 due to lumpy flexible pipe orders, while certain sub-segments such as turret mooring systems and offshore construction had book-to-bill ratios above 150% in fiscal Q2.
Automation & Digital: 220 NOVOS control systems sold, 134 installed; four robotic drilling upgrade packages commissioned with 11 more in the pipeline; Digital product revenues up 25% year over year.
Production and Midstream Revenue: Achieved highest quarterly revenue since 2019, driven by growth in unconventional gas markets.
SUMMARY
Management cited pronounced macroeconomic uncertainty and customer caution, as evidenced by a 9% decline in the U.S. oil-directed rig count since March and reduced global drilling activity. Amid unfavorable sales mix shifts and sharply lower spare parts bookings, consolidated margins compressed sequentially, with tariffs and inflation explicitly called out as persistent headwinds anticipated to intensify in the near term.NOV(NOV 0.66%) expects the remainder of 2025 to remain challenging, with North American shale activity drifting lower and limited reacceleration in Saudi Arabian drilling before 2026, but points to sizable backlog and international demand for capital equipment as partial offsets. Executives outlined a multi-pronged cost reduction initiative—including facility rationalizations, market exits, and business process redesign—targeting over $100 million in annualized savings by 2026, while emphasizing robust free cash flow conversion and flexible supply chain adaptation amidst elevated tariffs. Strategic commentary focused on anticipated 2026 recovery in offshore and international unconventional markets, with management projecting demand acceleration for NOV's deepwater, LNG, and production technologies as the industry pivots from North American shale to global offshore production and unconventional gas as incremental supply sources.
Clay Williams said, "I think that's gonna forestall further margin declines in the second half of the year, but most importantly, set us up for recovery in 2026 when the offshore goes back to work."
Rodney Reed detailed, "about a 300 basis point improvement year on year."
Jose Bayardo indicated, "pencils to help offset project costs that have increased 10% to 15% through more standardization and better coordination of order timing."
Management acknowledged, "Delays of offshore production vessel deliveries continue to have knock-on effects in the drilling space, resulting in the near-term white space utilization challenge that our customers face"
INDUSTRY GLOSSARY
Book-to-bill: The ratio of orders received (bookings) to completed sales (billings) in a given period, commonly used to assess demand trends in capital equipment businesses.
FPSO: Floating Production, Storage, and Offloading vessel—an offshore vessel that processes and stores oil or gas before offloading to a tanker or pipeline.
FIDs: Final Investment Decisions—major project approvals by customers, often marking commitment to proceed with production or development projects in the energy industry.
NOVOS: NOV's proprietary multi-machine drilling control and automation platform.
Full Conference Call Transcript
On a U.S. GAAP basis for 2025, NOV reported revenues of $2.2 billion and net income of $108 million or 29¢ 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. Thank you, Amie.
Clay Williams: For 2025, revenue of $2.2 billion was up 4% from 2025 and down 1% from 2024. EBITDA was $252 million or 11.5% of sales. Our Energy Equipment segment grew revenues 5% sequentially, as strong execution of capital equipment sales were able to more than offset a significant reduction in demand for aftermarket parts and services. However, the resulting unfavorable mix shift drove margins sequentially lower. Nevertheless, the segment delivered its twelfth straight quarter of year-over-year margin expansion. Energy Products and Services' solid 3% sequential top-line growth handily outperformed a 6% decline in global drilling activity, buoyed by higher capital equipment sales and greater penetration of our efficiency and enabling technologies in key markets.
That strength was partially offset by sharply lower demand for quick-turn consumable drilling and completion products in North America, Saudi Arabia, and Latin America, along with tariff-related and inflationary cost pressure factors that together compress segment margins. Against this backdrop, both segments remain focused on structural cost reduction and process improvement. Jose will provide additional detail on these initiatives later in the call. The 6% sequential decline in global drilling activity underscores market conditions that are growing more challenging. Macroeconomic uncertainty, the rapid unwinding of OPEC plus production quotas, and conflict in the Middle East have made customers more cautious. In North America, exploration and production companies moved decisively to curtail short-cycle activity.
The U.S. oil-directed rig count declined roughly 9% since March, and modest gas rig additions could not fully offset the drop. Pricing pressure is intensifying. Internationally, conventional activity also eased, Saudi Arabia suspended additional onshore rigs, and Argentina operators shifted focus from mature Commodore operations toward the unconventional Vaca Muerta play. In offshore markets, tariffs and cost inflation are prompting some operators to slow-walk certain projects which probably delays some final investment decisions. Importantly, we are not seeing these projects canceled, and we are continuing to advance discussions and FEED studies on multiple deepwater programs. Our offshore drilling contractor customers expect their white space utilization challenges to ease in 2026. On the whole, the remainder of 2025 will be tough.
We expect North American shale activity to drift modestly lower through year-end while Saudi conventional drilling may not reaccelerate before 2026. We think global drilling activity will slow further through the second half. Nevertheless, we expect NOV's backlog and fourth-quarter seasonal bulk tool purchases from international markets to support second-half sales that are flat to up modestly compared to the first half. For the third quarter, we forecast year-over-year consolidated revenue to decline between 1% to 3% with adjusted EBITDA to land in the range of $230 million to $250 million. Looking past near-term turbulence, NOV's opportunity landscape is compelling.
We expect offshore activity to accelerate in 2026, and our healthy pipeline of prospective FPSO awards should drive demand for NOV's production technologies. Globally, the push for secure affordable energy is accelerating investment in LNG and unconventional gas. Areas where our composite pipe, high-pressure, high-temperature solutions, and gas processing equipment excel. Importantly, our significant backlog and strong balance sheet give us the confidence and capacity to invest in these technologies. Stabilizing rig counts in the Middle East, incremental growth in Middle Eastern and Latin American unconventionals set up a more favorable market for 2026 in our view, assuming commodity prices are reasonably well-behaved.
To all my fellow NOV employees listening today, I want to thank you for the terrific job that you are doing. Our customers count on you and me every day to help them navigate tough market conditions. And Jose, Rodney, Amie, and I appreciate all that you do to support them and each other. With that, let me turn it over to Rodney to review the results for the second quarter. Thank you, Clay. Second-quarter consolidated revenue increased 4% sequentially and decreased 1% year on year.
These results reflect strong execution on our capital equipment backlog that was largely offset by lower aftermarket spare parts and consumable product sales due to softer oil and gas activity, all of which drove an unfavorable change in mix across our businesses. Consolidated adjusted EBITDA was $252 million or 11.5% of sales. Margins were pressured by this less favorable sales mix, higher tariffs, inflation-driven cost headwinds, and certain charges in Latin America.
Rodney Reed: During the quarter, we generated free cash flow of $108 million resulting in our team converting 83% of our EBITDA to free cash flow over the last twelve months. We continue to execute well on structural improvements to our working capital, including improved cash conversion cycle and inventory turns, which have resulted in a 300 basis point improvement year over year in working capital as a percentage of revenue. Over 2025, we repurchased 10.9 million shares for $150 million. Since we announced our share repurchase program during 2024, we have repurchased approximately 25 million shares.
Also during the quarter, we paid a quarterly base dividend of $0.75 per share and a supplemental dividend of 21¢ per share, resulting in dividends paid year to date of $135 million. Between buybacks and dividends, we have returned $620 million to our shareholders while increasing our cash balance by $612 million since 03/31/2024. That's a total of over $1.2 billion in free cash flow during the last five quarters. Our tariff expense for the second quarter was approximately $11 million. Since our April earnings call, there have been many announcements impacting trade policy, including a June increase in the rate of section 232 steel tariffs from 25% to 50%.
We continue to leverage our supply chain experience, versatile manufacturing footprint, and opportunities to apply USMCA to further reduce our tariff expense. Of course, the trade policy situation remains very fluid, and the impact could be greater if tariffs go higher. Operationally, we are heavily engaged in rewiring our supply chain to whittle down the impact. As a result of tariffs and persistent inflation in our supply chains, we are implementing cost reduction initiatives across the organization. Jose will cover specific actions we are taking. We expect the results of these initiatives will remove over $100 million in annual cost by 2026. However, increasing tariffs and inflation remain headwinds, which will offset a portion of the savings.
During the quarter, our tax rate was positively impacted by certain discrete items. We expect our full-year tax rate to be between 26-28%. Also, we expect eliminations in corporate costs during the third quarter to remain in line with 2025. Moving on to segment results. Our Energy Products and Services segment generated revenue of $1.03 billion, a 2% decrease compared to 2024. Due to lower global activity levels, which are partially offset by higher sales from the segment's capital equipment offerings, Adjusted EBITDA declined $38 million to $146 million or 14.2% of sales. The higher decrementals were primarily the result of less favorable sales mix, tariffs, and inflationary pressures along with certain charges in Latin America.
Year on year, product sales declined 20% offset by improved sales of capital equipment. Sequentially, segment revenues were 3% higher with stronger results from capital equipment sales, including our drill pipe and composite solution businesses. For the second quarter, the sales mix of energy products and services was 50% services and rental, 34% capital equipment, and 16% product sales. Revenue from services and rentals held flat year over year due to market share gains and new product expansions offsetting the impact of reduced rig counts. Our downhole tools business grew rental revenue low single digits compared to the prior year.
Growing adoption of our high-performance drilling motors and our downhole setting tools in North America along with increased rentals in international unconventional developments, helped to overcome the effect of drilling activity declines in other markets. Similarly, rentals of our drill bits grew low double digits year over year as operators in the U.S. continue to achieve higher rates of penetration and longer runs per bit using our high-performance bit cutter technology. U.S. land drill bit revenues grew over 30% year over year compared to a U.S. rig count decline of 5%. Tubular coating and inspection had a solid quarter with service revenue up mid-single digits year over year.
Increased tubular coating throughput and growing traction of NOV's high-temperature TK Dracon coating drove a low double-digit percent increase in North America coating revenue for Tuboscope year over year. The improvement in North America coating operations was partially offset by lower inspection revenues in Latin America. Solids control and waste management services declined by mid-single digits versus the prior year, primarily due to reduced activity in Mexico and Argentina's Commodore conventional play. Higher solids control service and rental revenue in Africa and increased drilling activity in the UAE partially offset these declines. Capital equipment sales increased low single digits year over year, primarily due to strong growth in NOV's Composite Solutions business.
Which more than offset a managed pressure drilling capital sale in the prior year that did not repeat. Composite solutions for oilfield infrastructure in the Middle East and North America FPSOs, and underground fuel handling tanks all realize robust sales. We expect increased growth in our composite Solutions business due to continued infrastructure build-out in international unconventional markets and fuel handling markets in North America. Turning to product sales within Energy Products and Services, revenue decreased 20% compared to 2024, primarily driven by market uncertainty, which amplified the effects of the decline in global market activity with customers pumping the brakes on relatively quick-turn consumable purchases mostly related to drilling.
For the third quarter, we expect revenues from our Energy Products and Services segment to be flat to down 2% when compared to 2024. With EBITDA between $130 million and $150 million. Moving to our 2025 was $1.21 billion nearly unchanged from 2024. Despite the flat revenue, EBITDA increased $16 million to $158 million resulting in a 130 basis point increase in EBITDA margins to 13.1% of sales, driven by higher margin backlog operational efficiencies that more than offset an unfavorable mix shift that resulted from a sharp decline in aftermarket sales. As Clay mentioned, this was the twelfth straight quarter of year-over-year margin growth for the energy equipment segment.
Capital equipment sales accounted for approximately 62% of the segment's revenue mix in 2025, up nearly 8% points year over year driven by production and drilling equipment. Aftermarket sales and services accounted for the remaining 38% of energy equipment revenue in the second quarter. In our drilling equipment business, aftermarket revenues were down year over year due to customers reducing spending in response to global trade uncertainty and lower oil prices. Spare parts bookings fell sharply during the quarter. We do not expect these levels of spare parts bookings are sufficient for the industry long term despite the pullback we've seen in rig counts globally.
Additionally, service utilization fell due to a slowdown of projects in China, but recertifications and upgrades remain active in Europe, Africa, the U.S., and Brazil. We're seeing automation upgrade opportunities, which Jose will cover in more detail. Revenue from aftermarket parts and services for interventions stimulation equipment was down high single-digit percentage year over year due to the decline in North America completion activity. Turning to the capital equipment portion of the Energy Equipment segment. Revenue grew low double digits year over year, led by growth from our process systems, subsea flexible pipe, and marine and construction businesses. Bookings declined 4% sequentially to $420 million.
Customers are trying to assess the longer-term impact of recent volatility in commodity prices, geopolitical conflicts, cost inflation, and trade policy uncertainty, which have resulted in certain projects pushing to the right. While uncertainty may continue to impact the timing of investment decisions, currently, we are not seeing projects being canceled. Second-quarter revenue in our subsea flexible pipe business reached an all-time high, growing significantly year over year with robust EBITDA flow through resulting from higher margin projects. The capacity in the market remains tight, and the outlook for our subsea flexible pipe business remains constructive. Our process systems business also achieved record high revenues with significant year-over-year growth.
Bookings were solid and included a monoethylene glycol unit for an operator in the Eastern Mediterranean in support of the global gas infrastructure build-out. While forecasts for FPSO FIDs in 2025 have moderated, the outlook remains encouraging. The onshore production market continues to be active for large international gas fields, and we're actively pursuing several projects that we expect to be awarded over the next twelve months. Our process systems and subsea flexible pipe business combined have booked $1.6 billion in orders over the last five quarters. Our production and midstream business also reached its highest quarterly revenue since 2019 due to growth in unconventional gas markets and strong execution.
Targeted R&D and investments in our production-related offerings have resulted in our subsea flexible pipe, process systems, and production midstream business revenues increasing from less than 20% of energy equipment revenue in 2021 to approximately 30% of the segment's revenue in 2025. Evidence that our innovation is driving growth and delivering solutions the industry depends on. Capital equipment sales from our Intervention and Simulation Equipment business decreased double digits year over year due to a steep drop in demand for pressure pumping equipment in North America, partially offset by solid demand for coiled tubing and wireline equipment in international markets.
We continue to see a growing number of opportunities for sales of completion equipment into international markets, particularly for the growing unconventional plays in the Middle East and Latin America. Revenue from our drilling capital equipment increased in the mid-teens year over year due to greater progress on projects. The outlook for drilling capital equipment orders remains modest given market uncertainties. Our marine and construction business experienced a high single-digit increase in revenue compared to 2024, driven by greater progress on crane and cable lay projects. After booking an order for a cable lay vessel in the first quarter, we received an order for a wind turbine installation vessel in the second quarter.
We continue to have active dialogue with customers for both Cable A vessels and wind installation vessels, and we see a healthy demand for our electric cranes driven by new build activity for multipurpose supply vessels. For the third quarter, we expect energy equipment segment revenue to decrease between 1% to 3% compared to 2024 with EBITDA in the range of $145 million to $160 million. With that, I'll turn the call over to Jose.
Jose Bayardo: Thank you, Rodney. As we respond to a softening global marketplace, we remain focused on positioning the company to capitalize on three longer-term 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, accelerating demand for natural gas driving meaningful growth from global unconventional gas resources. And three, the application of modern technologies to drive additional efficiencies in oilfield. Today, uncertainty is driving extreme fiscal austerity and a greater emphasis on operational efficiencies.
Customers are pushing their procurement teams to negotiate better pricing, but are also looking to and willing to invest in solutions that improve recovery rates, lower costs, improve safety, and reduce environmental footprint. In offshore markets, IOC and NOC customers remain confident in the mid to longer-term outlook due to plateauing North American offshore breakevens that are sub-fifty dollars per barrel and growing demand for cost-effective, secure, and reliable sources of energy. Existing projects continue to move forward at a healthy rate, and as Rodney mentioned, our businesses are executing exceptionally well on our healthy backlog of offshore production-related projects, driving a 9% sequential and 6% year-over-year increase in revenues from offshore markets.
Entering 2025, our customers had ambitious expectations regarding offshore FIDs and were planning to advance 13 FPSOs during the year.
Operator: Supply constraints, including long lead times for gas turbines and compressors,
Rodney Reed: congestion in shipyards
Jose Bayardo: inflation and macroeconomic uncertainties have caused customers to delay certain FIDs. We are collaboratively sharpening our pencils to help offset project costs that have increased 10% to 15% through more standardization and better coordination of order timing. These actions would allow us to build the same structures for multiple projects on one production run, improving efficiencies, throughput, and cost. While we've seen FIDs push to the right, to our knowledge, none have been canceled, and the mid- to longer-term outlook remains bright. Industry forecasts call for more offshore FIDs this year and see the potential for up to 50 FPSOs through the end of the decade.
Additionally, demand related to LNG products remains solid, as evidenced by a sizable award NOV received during the second quarter for a large submerged swivel and yoke system for a floating LNG project in Argentina. Delays of offshore production vessel deliveries continue to have knock-on effects in the drilling space, resulting in the near-term white space utilization challenge that our customers face over the next couple of quarters. As Rodney mentioned, our aftermarket business experienced a double-digit percent decrease in revenues driven by a sharp reduction in spare part bookings during the second quarter.
Customers tapped the brakes while digesting the macroeconomic and geopolitical volatility and after some of them gave themselves a little breathing room after making extra purchases in the first quarter to get in front of higher tariff costs. While this pullback was sharper than anticipated, we expect a slight rebound in the third and fourth quarters. For the full year, we now expect our drilling equipment aftermarket business's revenue will decline in the mid-teens. While near-term expectations have been tempered, our offshore drilling contractor customers remain confident in a meaningful recovery beginning in 2026, which would spur additional demand for spare parts, upgrades, and other projects as rigs prepare to move on to new contracts.
We're already seeing some signs of this through a growing number of projects we are planning to execute in the second half of the year. Consistent with the themes I previously mentioned, customers are investing in enhanced capabilities that drive operational efficiencies, such as increasing hook load capacity and automation. There's strong demand for deepwater rigs that have seventh-gen high-spec capabilities, including hook load capabilities of 1,400 tons or more and enhanced automation. We've had quite a few inquiries regarding additional hook load upgrades and we recently commissioned four automation packages, including one with our robotic system that allows for completely hands-free tripping.
We now have robotic systems active on four rigs with another 11 in the pipeline, and we continue to see growing interest from our customer base. International land markets remain mixed. The Middle East, growing activity in the UAE, Qatar, and Oman, along with demand for investments in infrastructure and capital equipment for the emerging unconventional basins or offsetting a stronger than anticipated deceleration in Saudi Arabia. The increasing number of rig suspensions in Saudi have led to a sharp decline in revenues for our shorter cycle energy products and services segment in The Kingdom. Similar to other markets, customers across The Middle East are looking for ways to become more efficient.
While procurement groups are pushing on pricing through competitive tenders, they are more open to direct awards related to differentiated solutions that drive operational efficiencies, such as the order we received for several surface automation systems that use our NOVOS multi-machine control system and Kaizen drilling. Additionally, while NOCs are increasingly leaning on major OFS companies for lump sum turnkey work, those OFS companies are increasingly turning to NOV for access to our technology to lower their R&D expense and reduce investments in their asset base. Demand for capital equipment in The Middle East remains resilient, as customers continue to invest in upgrading and modernizing drilling and completion equipment needed to efficiently develop unconventional resources.
Investment in production infrastructure needed for future development also remains strong, driving healthy demand for our composite pipes and our chokes. Despite the potential for additional rig suspensions, continued investments in equipment and infrastructure, along with some early discussions related to upcoming tendering, leave us optimistic for a potential rebound in activity by mid-2026. Similar to The Middle East, conditions in Latin America are also mixed. Mexico, Colombia, and Ecuador will remain challenged. In Argentina, we are seeing a slowdown in the mature conventional Comodoro field, and a shift to the unconventional resources of the Vaca Muerta in the Nequen Basin. Which as Rodney touched on, required us to incur some charges as we repositioned our operations in the country.
While the slowdown in the Commodoro has had a negative effect on our business over the past year, the longer-term outlook in Argentina remains very promising. We continue to see solid demand for our completion equipment and our downhole tools that drive efficiencies in extended lateral wells, which recently enabled our customer to achieve multiple drilling and completion records in Vaca Muerta. North America, operators have moved decisively to curtail oil-directed activity, only partially offset by an increase in gas-directed drilling. Our businesses outperformed changes in activity levels through continued market share gains, but the environment is becoming more challenging with many North American service companies and operators implementing restructuring and cost savings programs.
Land-focused oilfield service customers are limiting capital equipment while running equipment extremely hard and cannibalizing stacked equipment as a source of spare parts, potentially setting up an inevitable replacement cycle. E&Ps are shrinking capital plans and are seeking pricing concessions but they continue to prefer best-in-class products that drive efficiencies. They are designing well construction plans to achieve the lowest possible cost per foot. We've recently seen a push by multiple operators to reduce hole sizes and clearances to optimize hydraulics, drill faster, lower material costs, and reduce environmental impact. This shift created opportunities for us to gain share with several customers who recognized the superior performance of NOV's offerings and ultimately standardized on our kit.
They standardized on NOV's next-generation electronic drilling recorder, and remote drilling monitoring applications powered by our MAX platform, which will enable the customer to reduce complexity and offer advanced digital capabilities to its customers. As mentioned, the decline in oil activity in the U.S. has been partially offset by an increase in gas-directed drilling. As operators target deeper, higher pressure wells with higher bottom hole temperatures, particularly in the Haynesville and Eagle Ford, we're seeing increasing adoption of our Dracon thermal insulated pipe coating in our TundraMax mud chillers each of which significantly enhance performance and longevity of bottom hole assemblies.
While our latest generation of performance-enhancing technologies are commanding solid demand with accretive margins, the market environment has grown more price competitive. Over time, our better technologies have taken share from competitors, and some are now using price concessions to try to win back work in a market where tariffs are increasing product costs. Our team has done an outstanding job managing through the complexities of the continuously changing tariff policies, and we continue to do all we can to mitigate as much of the roughly $300 million in annual tariff costs that we would incur if we sat still.
As Rodney mentioned, we recognized a total of $11 million in tariff expense during the second quarter, with roughly 70% of this expense hitting our Energy Products and Services. We expect tariff expense to step up over the next two quarters and level off between $25 million to $30 million during the fourth quarter. We'll continue to identify additional measures to mitigate these costs or pass them on to our customers. This will continue to be challenging given current market dynamics. In order to offset these margin pressures, we're ramping up efforts to drive internal efficiencies and reduce costs across NOV.
We've identified over $100 million of savings that we expect to capture by 2026 through: one, simplifying, standardizing, and centralizing business processes. Since late last year, we have been developing plans to redesign certain business processes across NOV with a goal of lowering costs, reducing time, and further improving our customers' experience doing business with NOV. This will be a multiyear effort, but we have begun executing process changes and expect to begin realizing savings from this initiative later this year. Two, strategic sourcing. Tied into the efforts to standardize our processes, we are working to further leverage our spend across the organization to maximize our economies of scale through high-quality, low-cost sourcing, which is shifting under evolving trade policies.
Three, business and facility consolidations. During the second quarter, we began consolidating our completion tools operation into our downhole tools business and we merged our Grant Prideco and XL Systems conductor casing connector businesses into a new unit called Tubular Products. The consolidations allow us to better share resources between product lines and drive efficiencies and cost savings. Within other business units, we're consolidating facilities to unlock further efficiencies from lower overhead, rent, utilities, and better utilization of our asset base. Four, exiting product lines in certain markets. We're exiting product lines in markets in which we do not see a near-term path to generating an appropriate rate of return.
While exiting markets will reduce total revenue and EBITDA, these actions will be accretive to NOV's margins and return on capital. We also continue to work on plant-level operational efficiencies with a relentless focus on operational excellence. For example, in one of our plants, we're investing in an initiative where we expect to take our manufacturing cycle time down from sixty days to less than twenty, which should lower our costs, free up working capital, and allow us to be more responsive to demand. Near term, it will be difficult for these actions to outpace the effect of lower activity, higher tariffs, and other inflationary costs.
But over time, our efforts to better harness the power of NOV's platform will drive higher profitability, allow us to continue to generate significant levels of free cash flow, and further improve responsiveness to our customers. Technology and innovation remain core to NOV. And the actions we are taking will increase collaboration across our businesses enabling us to better leverage the unique combination of capabilities and data which reside under NOV's roof. I'm confident our efforts will accelerate innovation, and pioneer technologies to address the most pressing needs of our customers. As Clay mentioned, NOV's future is compelling.
The incredibly smart, talented, and dedicated people of NOV are continuously driving improvements across the organization positioning us exceptionally well to capitalize on longer-term trends that will require more of NOV's technology and services to develop affordable, secure, reliable, and cleaner sources of energy to power the world. With that, we'll open the call to questions.
Operator: Thank you. Our first question comes from James Rollyson with Raymond James. Your line is open.
James Rollyson: Hey, good morning, guys, and thanks for all the detail as usual. Clay, when you kind of step back and look at all the changes that have been going on, it seems like nonstop for several quarters. And the things you've been doing and as I look at margins, they obviously have come down from kind of the trajectory we were hoping to be getting towards mid-teens. And kind of indicated to go down a bit further at least through 3Q. I'm just curious as you stand back and look revenues were actually pretty decent this quarter relative to range.
And then you look at kind of mix changes that have been going on and maybe where that leads you into '26. You look at the cost stuff that Jose and Rodney just spent a bunch of time going over. And the impact that has. Like, how are you thinking about where margins you know, maybe could possibly bottom here in the next handful of quarters? And then, you know, what ultimately gets you to starting to ramp that back up, do you think? Because it like now, like, completely listing the actual potential, but
Clay Williams: It's a great question, Jim. I appreciate you asking. It has been a little frustrating. We were making progress in margins. The company basically tripled its margin from 2021 up through full year 2024. And despite some headwinds in our energy products and services group with its high North American and sliding activity. In North America, overall consolidated margins were increasing. Of course, with the developments that we've seen through 2025 with OPEC plus announcing two plus million barrels coming back on the market. With all the tariff drama and concern about economic growth and so forth. It's obviously gotten a lot tougher. Rodney and Jose stepped you through the actual tariff impact on our results.
But Jose, importantly, Jose really stepped you through our plan to address, which is to continue to take costs out. I'm very optimistic about that. I think that's gonna forestall further margin declines in the second half of the year, but most importantly, set us up for recovery in 2026 when the offshore goes back to work. And we can get back on making a better margin progress. But, you know, if you step back, if you kind of get out of all of the headwinds and the drama around tariffs, and economic growth and excess supply of oil, you know, I could not be more excited about the future of this company.
There are two big things going on in the oil field that are really gonna drive NOV's fortunes in the next decade. And the first is after twenty years of honing unconventional technology in North America and extending laterals from a few thousand feet out to a mile out to two miles to three miles an hour four miles based on technology that NOV and others have provided on really honing the unconventional technologies that's made the Shell revolution possible. You're really seeing this applied to shale basins in international markets in earnest by serious expert E&P unconventional drillers. So people like EOG and Oxy and Continental going to a lot of different places.
This is just isn't just Saudi Arabia. And Argentina. Now we've got a lot of people applying this amazing technology to places like Turkey and Oman and Australia. To Pakistan, to UAE, to Bahrain, to Algeria. And so you know, a successful unconventional development requires a lot of infrastructure build-out, which is right in NOV's wheelhouse. And so I think that's really setting us up to support that effort and very excited about that. And, of course, the other big thing that is gonna drive our fortunes is the reemergence of deepwater activity, which is sort of an AWOL for the past decade or so.
But as Exxon has proved in Guyana and others are starting to prove there's still a lot of very economic reserves to find in deepwater basins, and you've In Senegal, in Suriname, Eastern Mediterranean. You're seeing more gas activity in Asia. The Paleogene in the Gulf Of America. All of this also requires the sophisticated tools and technology that's right in NOV's wheelhouse as well, and it's gonna continue to grow. So strong economics, you know, economic below $50 a barrel is as Jose said. Expectation is deepwater is gonna grow up to 13 million barrels a day or so by 2026. It's going to supplant North America shale as the new incremental source of production.
And so I think we have much, much brighter days ahead. We got, you know, we do have some drama next few quarters, margin challenges with tariffs and inflation, etcetera. But very confident we're going to power through that and see rising demand in these other areas.
James Rollyson: And I guess I'll shift gears since you just laid that out I presume the deepwater market is the bigger of the two next five to ten year opportunity sets for you.
Clay Williams: Probably, but both were yeah. Probably. But I think both big trends will require a lot of NOV tech technology and tools. And so we're here to make that happen.
James Rollyson: I appreciate that. Thanks, Clay. You bet. Thanks, Jim. One moment for our next question.
Operator: Our next question comes from Stephen Gengaro with Stifel. Your line is open.
Stephen Gengaro: Thanks. Good morning, everybody. Morning, Stephen. So I was curious at a high level, Clay, like when we think about the macro, we're constantly trying to find a bottom and look for signs. What are you focused on over the next two, three, four quarters that kind of signifies to you that things are turning a corner? How do you sort of think about the market? And maybe I know it's maybe a little hard, but how does it compare to prior cycles you've seen?
Clay Williams: This you know, nothing terribly surprising given the pressure on commodity prices and so forth. This is what our customers do. We've become really good at hunkering down in the face of downturns, and so I think that's what portions of our customers are doing. Others aren't. In terms of what's needle moving for NOV, I think as offshore drillers in particular lean into expect new contracts and expecting expected increases in activity in 2026. We're gonna start getting more inbound calls around equipment projects, spare parts, and we'll see that in the drilling side of our business.
The production side of our business in energy equipment, despite low orders in Q2, which contributed to low book to bill, the production side of our business is super healthy and very, very well, and we expect that'll continue. But for right now, you know, this is we're just in a market that with pressure on commodity prices, uncertainty in demand growth, OPEC bringing back so many barrels. There's just no it's taken a lot of urgency out of our customers' plans, and so that's what we're seeing. I think that will start to come back once we get into 2026, the excess barrels are cleared.
The industry continues to prosecute the LNG projects that it's working on, and I think things will have a, well, like I said, think a lot of a much brighter outlook.
Stephen Gengaro: Great. Thanks. And then the other question I had was around cash generation. Can you sort of share kind of an updated thoughts on how we should think about working capital as the year evolves and maybe kind of normalized level of CapEx we should be thinking about over the next couple of quarters?
Rodney Reed: Yes, Stephen. This is Rodney. Thanks for that question. So yeah, really, really proud of the team's efforts over the last twelve months. We highlighted a really strong free cash flow conversion. On a trailing twelve-month basis of over 80%. Q3 working capital as a percentage of revenue at 30%, about a 300 basis point improvement year on year. As we look at the second half of the year, the couple of data points we mentioned, you know, previously, CapEx, to be, relatively consistent to last year, maybe slightly up. And we've mentioned working capital as a percentage of sales for a full-year basis to be in the range of 27% to 29%.
So as we look at that in terms of free cash flow conversion, on a full-year basis, sort of getting to the top end of that range in terms of 29% of working capital as a percent of revenue that would, you know, get us to a free cash flow conversion of, EBITDA to, to a little over 50%. If we're, you know, a little bit better on the working capital side, you know, closer to sort of 28, 27%. That free cash flow conversion would move up higher from there. But, you know, good outlook on the cash flow for the second half of the year.
Stephen Gengaro: Great. Thanks for the details.
Rodney Reed: Yeah. You bet.
Operator: One moment for our next question. Our next question comes from Doug Becker with Capital One. Your line is open.
Doug Becker: Thank you. Clay, you've taken a lot of cost reduction steps over the last several years. I was just hoping to get some context about what size market you're preparing for. So is it one with slightly higher activity than today? Little bit lower, and maybe it's some mix with more active offshore, a little less active onshore. But just to get a sense for what you're prepared for and what else might be available on the cost reduction initiatives? Well, we're prepared for and hoping for a much larger market in all these categories.
Clay Williams: And again, going back to what I said earlier, Doug, we see demand for unconventional technology and tools growing in international unconventionals. We see demand for technology tools growing in deepwater. I think that's out there in the future, but we're also realistic. I know our customers right now face some concerns about commodity prices and the like. But, you know, in the meantime, Jose said, we're continuing to focus on becoming more efficient, combining facilities where we can, closing locations where, hey. We're not making money in this market. We probably need to exit. And so it's really all about you know, the market is what the market is. And we gotta manage to that.
And it's about becoming the best company we can be given kind of what's out there. But like I said, I do think there's growth out there in our future. I think there's this pivot from North America shale. Which was just amazing and its ability to add barrels to the market through the past decade. I think that's I'm not calling the peak, but I think we're certainly a lot closer to peak than we would have been a few years ago. And I think the industry is finding that deepwater barrels are sort of the next economic barrel to supply incremental demand requirements for oil.
And they're also finding that offshore is a nice place to find gas and convert it to LNG. And so that's another sort of growth driver. And so it'll be easier to adjust to the needs of our customers and demand for our products and technologies. And that's our plan.
Doug Becker: Yeah. And, Doug, it's Jose. I'll tag on to that. So you know, as Clay touched on, this isn't sort of a radical downsizing that we're going through because we think that the market has fundamentally changed. I think, you know, look. When we came into 2024, we're pretty optimistic about the outlook for the next several years and how well the company was positioned, for where the market was heading with plateauing North American production, more activity going. To the international and offshore. What has changed is an acceleration of the unwinding of OPEC plus the trade uncertainty and the tariff costs that have come into that. It's all created a lot of geopolitical macroeconomic uncertainty.
So, I mean, the way I look at it is these are transitory type items. The rapid unwind of OPEC plus is painful near term. But probably positive for the overall industry longer term. And so as it relates to the actions that we're taking, this is really just a continuation and maybe a slight harder lean into the actions that we have been taking the last several years to really position ourselves to capitalize on where we see the market going. Into the future. So the things that I talked about related to the structural cost savings on driving process improvements and efficiencies. Those are things that we've been working on for some time.
Also, we've been making a lot of investments in our manufacturing capacities overseas knowing that's where the market is heading. So there's really just a shift that's underway and a repositioning of the business. So don't take it as, hey. We're downsizing because fee for will be lower. No. We don't think that's the case. We just think that activity will be positioned in different markets. Going forward. Frankly, we've been working on that for the last four or five years.
Doug Becker: That makes a lot of sense. Maybe just sticking with the cost out efforts, the $100 million, just kind of spread evenly between fourth quarter of this year and through 2026?
Clay Williams: Yeah. Think that's a safe assumption. We're not getting into specifics on each dollar per quarter. But honestly, as I mentioned, these are there have been efforts underway the last couple of quarters, and you've seen some small restructuring charges over the last couple. Now we are, as I mentioned, leaning into it harder also over the last two or three quarters, we've been implementation over the coming quarters, is a reasonable assumption. But as we mentioned in the prepared commentary, offset here near term over the next couple of quarters, more than offset by the increase in tariff expense.
But then as we move through 2026, hopefully, we make up all that lost ground and we end up really well positioned to drive much higher margins.
Doug Becker: Yep. Start cutting out there, doc. I think I got it. You very much. Sure. Thanks, Doug.
Operator: One moment for our next question. Our next question comes from Grant Hines with JP Morgan. Your line is open.
Grant Hines: Hey, good morning team. Morning. Morning, Grant. So you provide a pretty encouraging update on the flexible side, and maybe I was just wondering if you could highlight some of the app performance there. Looks like $1.6 billion of orders the last five quarters across process systems and subsea flexible pipe. And I think, you know, that I would be recently participating in that Petrobras flexible contract over a billion in total. Mhmm. That's we can expect in bookings kind of three q or, I guess, how we should think about timing there?
Clay Williams: Well, I'm gonna stay away from specific guidance on specific order, if you don't mind. But I will say broadly, the flexibles a pipe business, which sells into deepwater development, is doing very, very well. It's outstanding execution, really strong orders, for the group over the past year plus. And so we've been very pleased with that. You might be a little bit surprised to hear, though, that when we look back at the second quarter orders for the energy equipment group, it actually had very low orders because those orders tend to be really large and lumpy.
And so the 66% book to bill which came in below kind of our expectations we didn't expect to hit one, but we expected it to be closer. The 66% that we actually put up was because we had pretty low orders for flexible pipe in the second quarter. And while I'm on that, let me just go ahead and provide some additional color around that. A wide diversity, let's say, of book to bills across the products in the end markets that the energy equipment segment serves. So elsewhere within deepwater, swivel stacks, and FERC mooring systems for FPSOs. turret mooring system business APL did over 200% book to bill. In the second quarter. So very strong orders there.
Likewise, the gas processing business Grant, you might be surprised to hear that demand for overseas and in international markets. And so levels of bookings in the second quarter, less than 30% book to bill for rig. Due to the white space challenges over the next quarter or two. And then finally, in wind and offshore construction, you know, north of a 150% book to bill. Really strong demand there. So the kind of the four main end markets that we see in energy equipment all vary pretty widely in the quarter, but they're all gonna be a little bit volatile because our orders tend to be tend to be lumpy.
So when I turn and I look to the future, the third quarter, back to flexible pipe, we're pretty encouraged. We've already landed an order north of a $100 million in that business unit in the first few weeks of Q3. So I think that business stands a pretty good chance of getting back over 100% book to bill in the third quarter, really strong pipeline projects out there. Likewise, gas processing, some large projects out there. The tendering activity is actually up for gas processing year over year. Nevertheless, I think Q3, they've had strong shift I think it's likely to be a little bit below 100% book to bill.
I think shifting to drilling, rig is gonna continue to be pressured on orders, probably pretty low in the third quarter, even though there's some interest in improving hook load capacities and 20,000 psi. Pressure capabilities, possibility of a new jack up in the second half of the year, but we're not counting on that. So Than a 100% book to bill in Q3. And I think stimulation equipment actually may surpass a 100% book to bill in Q3. So you've got all these different and lastly too, let me cover off wind and offshore construction. It continues to be really strong.
We do expect a cable a vessel in a winter turbine installation vessel sometime in the second half of the year. And we've seen really strong demand for subsea cranes as well. And so I think that business should have a pretty decent second half with to bookings. So we've got these businesses in end markets with sort of different levels of demand, but back to your original question, flexible pipe has really been executing super well in seeing really high levels of demand.
Grant Hines: Appreciate the in-depth color there. And maybe just as a follow-up, I think you'd mentioned commissioning of some automation platforms and know, the robotic system sort of in the pipeline. And as we think about the recovery kind of in offshore, could you maybe give us a sense of what the rate of adoption has looked like on some of this technology? Thanks. Yeah. Hey. It's Jose. So we're really excited about kind of what's happening from an automation standpoint. Really good traction in the marketplace. And a pipeline that is extending. So first of all, you know, just you know, this all kind of started with the with our commercialization of our Novos platform, a number of years ago.
And that adoption continues to take place at pretty rapid clip. So that's the multi-machine control system that enables all the other automation that happens within the rig. So to date, we've sold about 220 of those Novos, systems, and we've had about 134 systems that have been installed and commissioned. And so, obviously, we've got a good pipeline of systems that we're waiting to get implemented. Robotics has been extremely promising, something that is really getting a lot of attention and a lot of excitement.
Talked about that we've got four systems that are now commercial, combination of both land and offshore rigs, and we've got another 11 in the pipeline, and we're getting really positive feedback from our customers on that. In fact, some of our customers are now telling us that they think this is going to be the next top drive for the industry. So that's super exciting. And see, really good prospects for that offering. Plus, we have all of our digital services that support drilling and, frankly, more and more completion and now production-related services. So, you know, across our platform, you know, we continue to see really good uptake sequentially revenue from our digital products offering is up 7%.
It's up 25% year over year. You know, just a couple of quarters ago, we introduced our Max production, addition to our Max platform. For our artificial lift business, and we're getting really strong reviews from our customers on that front. And we saw basically, installations and adoption for that double, over the last quarter. So everything's heading in the right direction. From an automation and digital standpoint, and see a lot of running room to go in the future.
Grant Hines: Appreciate it. Thanks, Grant. One moment for our next question. Our next question comes from John Daniel with Daniel Energy Partners. Your line is open.
John Daniel: Hey, good morning, guys. Thank you for including me. Morning, John. Clay, the last couple this morning, Ranger announced the gonna build out a couple electric rigs that follows Axis doing that. I know this might be small for you guys, but in your mobile rig business, can you speak to the opportunity you see for sort of retrofitting the US well service fleet and just the outlook for that? Yes. I would say, well, first of all, again, as a matter of policy, don't like to comment on any particular customer or project. But I will say a lot of categories across fit for purpose oilfield equipment have converted to over the past couple of decades.
And so, you know, drilling rigs, you move from mechanical torque converted to DC electric and then to AC electric. And as you sort of make that progression, and I would add in, we've done the same in wireline units and coiled tubing units. In all categories. There's sort of this interest in continuing. And what I would say as a category, well, service rigs, and you know this. And, I think there is a real potential there to get better, more precise control with newer, more modern assets that are electric. I think there's a potential to make those service rigs safer.
You by making them electric and provide more sort of real-time monitoring, which enables condition-based monitoring and predictive analytics that can enhance maintenance programs and extend the lives of those assets and things like that. So it's sort of one more category. Of oilfield equipment that I think can benefit by migrating to electric.
John Daniel: K. I won't name the customer, but one company has ordered a two and seven AC unit coil. And I'm just curious. Do you think that the two and seven AC market, could we see some sort of structural redefinition in terms of size of CT units? It seemed to keep getting bigger. Just what maybe Jose is seeing there.
Jose Bayardo: Yeah. Hey, John. So, yeah, there's a lot of things going on, and consistent with the commentary and the theme, the primary theme that we're seeing across all markets is that folks are willing to pay for things that can drive improvements to their economics. Right? And so, there's always been the challenge of, okay, how deep and how far out can you go from a coiled tubing drill out standpoint, which is the quickest, most efficient way to do the drill outs. We've seen tubing sizes get bigger, strings get longer, equipment getting bigger and bigger.
And the need for, frankly, better technologies to continue that trend of going from one mile lateral to two miles to three miles, and now at times, we're seeing four miles. So bigger tubing diameter along with, frankly, one of the things that an agitator system not just for the BHA of a coiled tubing string, but has a really proprietary connection that can be used to join two separate strings of pipe and connect them to be able to enable even longer lateral usefulness related to coiled tubing drill outs. So there's a lot of innovative things that continue to go on within NOV and gonna continue to be on the front end of those things.
John Daniel: Right. Well, thank you for allowing me to ask a couple of nuanced questions. I'll turn it back over. You bet, John.
Operator: And now I'd turn the call back over to Clay for any further remarks.
Clay Williams: Thank you, Kevin, and thanks to all of you for joining us this morning. We look forward to discussing third-quarter 2025 results with you in October. Kevin, you may wrap up the call.
Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.