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Edited Transcript of NOV earnings conference call or presentation 28-Apr-20 3:00pm GMT

Q1 2020 National Oilwell Varco Inc Earnings Call

HOUSTON Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of National Oilwell Varco Inc earnings conference call or presentation Tuesday, April 28, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blake McCarthy

National Oilwell Varco, Inc. - VP of Corporate Development & IR

* Clay C. Williams

National Oilwell Varco, Inc. - Chairman, President & CEO

* Jose A. Bayardo

National Oilwell Varco, Inc. - Senior VP & CFO

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Conference Call Participants

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* George Michael O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research

* Kurt Kevin Hallead

RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - MD

* William Andrew Herbert

Simmons & Company International, Research Division - MD, Head of Energy Research & Senior Research Analyst of Oil Service

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the National Oilwell Varco First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

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Blake McCarthy, National Oilwell Varco, Inc. - VP of Corporate Development & IR [2]

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Welcome, everyone, to National Oilwell Varco's First Quarter 2020 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO.

Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.

Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the first quarter of 2020, NOV reported revenues of $1.88 billion and a net loss of $2.05 billion. 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.

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

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Thank you, Blake. This has been a challenging time for all of us. As we always do, Jose and I will be discussing the results of operations through the first quarter of 2020 and our actions and expectations as we look to the future. However, first, I want to say that our thoughts are with those most affected by COVID-19, particularly those on the front lines of this crisis.

In the past several weeks, we have sought to both protect the health of our employees and to serve our customers who are facing daunting challenges and are relying on NOV to keep their operations running. This has been no easy task. As of today, 64 NOV facilities around the world remain shutdown due to government mandates, which means approximately 3,300 of our valued employees globally are unable to come to work. This number varies daily with evolving government restrictions and was as high as 4,000 employees a few weeks ago.

Additionally, thousands of other NOV employees have been working from home or are working reduced hours. The rest of our facilities remain operational, although challenged. Many are shorthanded and some working flex shifts. We are committed to operating in a safe a manner as possible. And we've been able to do that, thanks in large part to the multitude of social distancing measures implemented by our management and the careful adherence to these measures by our employees.

Social distancing at NOV includes modified scheduling, staggered lunch breaks, mandatory periodic hand washing, incremental facility cleanings, working from home where possible, telephone and video conferences instead of in-person meetings and increased spacing on shop floors. NOV's facility managers have stepped up to do an amazing job leading their teams safely through this scary pandemic, and I'm grateful for their leadership.

NOV's employees are also working to help support our communities during this pandemic, including donating personal protective equipment and cleaning supplies to frontline emergency personnel and delivering portable generation systems from NOV's WellSite Services business to provide critical power and air conditioning to COVID-19 quarantine testing and distribution centers. In fact, NOV engineer helped design a low-cost mechanical ventilator and is now working with the Massachusetts Institute of Technology to validate the design and create a 3D model that will be used to print the ventilator using additive manufacturing.

During the first quarter of 2020, NOV's consolidated revenue declined 17% sequentially, and EBITDA fell to $178 million or 9.5% of sales. Continued deterioration of the North American market, international seasonality and operational challenges posed by the COVID-19 crisis led to all 3 segments reporting sequential EBITDA declines. Although difficult to measure precisely, we believe the COVID-19 disruptions through March 31, 2020, negatively impacted our reported adjusted EBITDA by approximately $40 million. Delayed shipments which may or may not be made in future quarters and services that NOV could not perform due to travel restrictions made up the bulk of this.

When we reported our fourth quarter 2019 results in early February, we noted that our fiberglass pipe plant in China was closed, an early example of what I'm talking about. That plant reopened in March, but it continued to experience supply chain disruptions, including difficulties in obtaining resins and other raw materials, and accessing freight to ship its products. The facility worked shorthanded throughout the quarter because certain employees that had traveled home for the holidays could not return to work, limiting the plant's absorption and efficiency. The good news is that things have slowly gotten back to normal for us within this particular facility. In fact, all of our Chinese facilities are largely back to normal. The bad news is that many facilities in other countries have been pulled into a similar trajectory as we entered the second quarter, which has seen similar challenges; employees prohibited from coming to work, shutdown suppliers, shortages of freight and freight containers, service technicians prohibited from entering customers' facilities or rigs or at times even being required to quarantine for 2 weeks prior to entering these.

Our offshore drilling customers and those with remote international operations typically rely on skilled international workforces that may travel in from several countries to work their 28-day hitch. These operations also count on specialized experts, like NOV's service technicians to travel internationally to and from these facilities to perform specific tasks related to the maintenance repair and efficient operation of these rigs and facilities. The imposition of 2-week quarantine requirements or outright travel bans has proven highly disruptive to the normal flow of these kinds of operations, to say the least.

Interestingly, the threat of disrupted supply chains has presented NOV with the opportunity to introduce new ways of doing business. For example, NOV's proprietary Tracker Vision system permitted one of our customers to perform a factory acceptance test of his equipment remotely by a satellite link-up with augmented reality, keeping his project on schedule despite the disruptions. Tracker Vision also enables efficient remote troubleshooting and support of ongoing operating equipment.

Select NOV businesses also outperformed expectations as a result of the pandemic. Orders for spare parts for rig equipment actually increased 4% sequentially, increasing in February and March as concerns began to grow around the supply chain disruptions from customers that did not want to be caught short of a critical spare part with no way to access it. Demand for certain other industrial products for pharmaceuticals and consumer products increased in response to the war effort to defeat the virus.

Nevertheless, overall, COVID-19 has affected NOV and our customers quite negatively. And unfortunately, the destructive nature of this deadly virus doesn't end there. It impacts -- its impact on our economy and industry will present additional longer-term challenges. The economic shutdown to slow the virus' spread has resulted in an unprecedented decline in global economic activity and crude oil demand.

With 1/3 of global population quarantined in their homes instead of driving and flying, demand for crude oil has declined 20 million to 30 million barrels per day or 20% to 30% of the roughly 100 million barrels per day that we consumed and produced before. As production has continued at more or less the old rates, storage tanks around the world are filling rapidly and will soon be full. Oil prices have been crushed and prices in many regions are now below cash operating costs, meaning producers spend more to produce oil from existing wells than they make in revenue. This will lead to shut-ins by their owners to conserve cash.

In other regions, pipelines and transportation companies have refused acceptance of crude regardless of its lifting costs because there is simply no place for it to go, which will lead to additional forced shut-ins. In the aggregate, we are on the precipice of forced well shut-ins totaling 15 million to 20 million barrels of oil per day, a scale never before seen in this industry.

Rig and well servicing activity around the world, particularly in North America, is plummeting as it is difficult to make an economically rational argument that anyone should be drilling a new well against the current commodity backdrop. While international markets tend to react a bit more slowly due to the longer time horizons of the NOCs and IOCs, they are not immune to the stark realities of this price collapse and will significantly curtail their spending later in the year. This will likely be the worst downturn that any of us in the oil and gas industry will experience in our lifetimes. Many companies will not make it, but NOV will.

NOV is fortunate to have a strong balance sheet and $3.1 billion in liquidity. Nevertheless, to ensure that we survive now and prosper later, we must continue to take measures and maximize cash flow. Avoid consuming cash and protect, defend and strengthen our enterprise through this downturn. Critically, NOV offers a diverse portfolio of products and services that span all phases of oil field activities. NOV possesses the largest installed base of products across several categories and as OEM benefits from our customers' need for OEM support to run their assets. NOV is geographically diverse. We work in every major oilfield basin globally, where we are legally permitted to do so. We are balanced between North America and international markets, land and offshore, and drilling and production.

NOV is a technology and market leader benefiting from first mover scale economies and intellectual property advantages in the basic inputs required for safe and efficient oil and gas operations. All of this stabilizes and strengthens our enterprise through periods of hardship. Through the past few years, we've taken several tangible steps to improve our resiliency and performance to adapt to a more challenging set of market conditions.

In 2017, unsatisfied with our cash generation from working capital, we implemented measures to reduce the working capital intensity of our business, including directly tying management compensation to net working capital targets. In 2018, we saw our working capital intensity fall from 44% the prior year to 37% by year-end, and we added economic value-add criteria to our long-term incentive compensation awards to improve focus on return on capital. In 2019, we strengthened our balance sheet by reducing our debt by $500 million and refinanced another $500 million, extending maturities out to 2029 and further reduce working capital to 31% of annualized revenue by year-end.

We also analyzed our product portfolio to optimize capital allocation to the highest return opportunities and exited business lines where we are no longer the best -- we also analyzed our product portfolio to optimize capital allocation to the highest return opportunities and exited business lines where we are no longer the best owner. Importantly, we avoided the temptation to pursue large empire-building acquisitions that would have levered up our balance sheet and eroded our return on capital.

In 2019, we also undertook another company-wide cost savings initiative that by year-end achieved $170 million of annualized savings and identified another $60 million for a total of $230 million in anticipated annualized cost savings. These measures formed our foundation for 2020. On a year-over-year basis for the first quarter, NOV posted an increase in EBITDA of $38 million, despite a reduction in revenue of $57 million, reflecting the hard work the team put in during 2019 to reduce our cost structure and improve the operating leverage of the company. But as we face the harsh realities of the oil and gas market in early 2020, it is clear that we must do more.

As NOV continued to adapt its operations to very fluid COVID-19 pandemic countermeasures through the first quarter of 2020, the company has remained focused on cash generation and continued to shrink inventories and improve collections. Our sales professionals have heightened their focus on improving collections in coordination with our credit collections teams. Our supply chain managers are seeking and achieving discounts from our suppliers, including our landlords for the facilities that we will retain.

We reduced our expected capital expenditures for 2020 by about 25%. Most importantly, we have accelerated our cost-cutting efforts. We now estimate that we will increase our previously stated goal of $230 million in annualized cost savings to $625 million a year, and we expect to achieve this run rate by year-end 2020.

We have reduced our workforce, our facilities footprint and management compensation. Although we have trimmed and slowed spending on certain technologies, we continue to invest in new products and technologies that will shape our organization and extend our competitive leads as the market emerges from the current downturn. By making the right moves now, NOV will exit this downturn stronger and leaner and with the capital necessary to take advantage of strategic opportunities that will emerge. Capital in the oil and gas space gets more valuable every day, and NOV will be in the small club of oilfield service companies that have it. Our customers recognize this as several have expressed their intentions to put more of their business our way, knowing that we will survive to support them in the future.

Before I turn it over to Jose to discuss financial results, I want to make one thing clear. This virus is not going to keep the global economy down forever. And when the world wakes up from this, we're going to need oil and gas again, and we are going to need it for decades to come. This massive historic contraction in a critical industry will affect the future supply curve dramatically. When demand recovers, this industry will find itself short of capital, of people, of equipment. A huge opportunity for those of us in the oilfield services industry still left standing.

To our employees listening around the world, we have a very difficult 2 years ahead of us. It is your focus, your resiliency and your hard work that are going to get us through these tough times, and I have never been more thankful to have you on our team. Jose, Blake and I appreciate all that you do. Stay safe and know that better days lie ahead.

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

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

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Thank you, Clay. NOV's consolidated revenue decreased $398 million or 17% sequentially due to seasonal declines in certain international markets, the ongoing contraction in U.S. drilling activity and COVID-19 related disruptions. Despite the sharp contraction in revenue, our accelerated and expanded cost out efforts limited sequential EBITDA decremental margins to 28%, resulting in a $110 million decrease in EBITDA to $178 million.

Year-over-year revenue decreased $57 million, and EBITDA increased $38 million, which when adjusted for pricing and mix reflects the approximately $63 million per quarter or $250 million in annualized cost savings realized since the beginning of 2019. After we recognized the magnitude of damage COVID-19 would inflict on global energy demand, we immediately began implementing numerous additional cost cuts, which include the elimination of certain layers of management and the acceleration of decisions to exit operations that did not meet our return thresholds.

By decisively executing on these new initiatives, we have now removed costs that exceed our prior target for year-end 2020. We continue to execute on many longer lead time initiatives and, therefore, increased our total targeted cost savings relative to the beginning of 2019 to $625 million, which will require us to achieve an incremental $375 million in annualized cost savings during the remaining 3 quarters of 2020.

Cash flow from operations was $39 million for the quarter and capital expenditures totaled $68 million, resulting in a small use of cash during the first quarter. While we expect to generate positive free cash flow the remainder of the year, the outlook remains opaque, and we anticipate working capital metrics will deteriorate due to the pressure on our customers to preserve liquidity and an increasing proportion of business from international markets. As Clay mentioned, we believe we have more than ample liquidity to navigate through the severe downturn.

At March 31, our net debt totaled $887 million with $1.1 billion in cash and $2 billion in debt. We have $400 million of notes due December 2022, which we intend to pay off with cash well before that date. Our other maturities are in December 2029 and December 2042. Our primary $2 billion credit facility expires in October 2024, remains unused and is only subject to a 60% debt to capitalization covenant.

As of March 31, our calculated covenant debt-to-cap ratio was 29%. During the quarter, we took $2.3 billion in mostly noncash impairments and other charges due to the deterioration in global market conditions and our ongoing restructuring efforts. We expect our depreciation and amortization expense to decrease to $80 million in the second quarter as a result of these impairments.

Moving to results from operations. Our Wellbore Technologies segment generated $691 million in revenue in the first quarter of 2020, a decrease of $73 million or 10% sequentially. Revenue from North America declined 2%, in line with the average decrease in drilling activity during the quarter, while revenue from the segment's international operations declined 18% due to a combination of seasonality, large year-end sales of equipment that didn't recur in Q1 and impacts from COVID-19 related disruptions. Incremental costs incurred from these disruptions along with a less favorable business mix and the anticipated respite from aggressive cost savings realized in the preceding 2 quarters led to outsized decremental margins and a corresponding EBITDA decline of $40 million sequentially to $103 million.

Cost savings realized to date have resulted in significant improvement in profitability for Wellbore Technologies segment, as demonstrated by the 12% decremental EBITDA margins when comparing this quarter's results to Q1 of 2019. This equates to capturing more than $110 million of annualized cost savings during the past year. As COVID-19 and ensuing collapse in commodity prices have thrown our customers' plans into disarray, we continue to move quickly and decisively in rightsizing our operations to successfully navigate through rapidly deteriorating market conditions.

Our ReedHycalog drill bit business posted an 8% sequential decline in revenue which was primarily due to seasonal declines in the Eastern Hemisphere, falling activity in the U.S. and COVID-19 related disruptions. Revenue declined only 1% in North America as stronger activity in Canada mostly offset declines in the U.S. In our international operations, COVID-19's disruptions amplified seasonal declines and began to affect this business unit's operations late in the quarter. Mandatory shutdowns of all our Eastern Hemisphere bit manufacturing facilities required that our Texas plant supply our global customer base. While we've been able to meet the delivery needs of our international customers, having to hot shot deliveries using shipping service providers facing their own COVID-19 related challenges resulted in higher costs.

Looking ahead, we expect seasonal recoveries in certain international markets and tenders in which ReedHycalog captured additional market share will only partially offset the sharp activity declines across most of the Western Hemisphere and Africa and the ongoing COVID-19 related disruptions in the Middle East and Asia.

Revenue in our Downhole Tools business unit fell 6% sequentially. A slight decrease in U.S. revenue was mostly offset by stronger Canadian activity, resulting in a 1% decline in revenue in North America, where our new drilling motor, Agitator, and other drilling tool technologies have enabled us to gain market share due to their proven ability to meaningfully reduce costs for our customers.

Revenue from international markets declined 11% due to regular seasonal fall off and delayed deliveries in certain Eastern Hemisphere markets from COVID-19 related disruptions. Our downhole management team is working to quickly reduce the business's footprint and cost structure while continuing to focus on execution and leveraging our technology leadership to gain market share. Despite their efforts, we expect to see a shortfall in downhole's revenue during the second quarter with high decrementals.

Our MD Totco business unit's core rig instrumentation business declined 5% sequentially. Market share gains drove a slight sequential improvement in revenue from North America, which was more than offset by seasonal declines in the Eastern Hemisphere and COVID-19 related slowdowns across most of Latin America. Revenue from MD Totco's drilling automation services realized a sequential decline in revenue due to projects which completed in Q4 and in early Q1. However, we expect several new automation projects to commence throughout the second quarter which should drive sequential improvement in revenue associated with its growing product offering. Unfortunately, this growth will not be enough to offset the rapid contraction in global drilling activity which will directly impact MD Totco's core operations and results in a harsh sequential falloff in revenue at high decrementals.

Our Grant Prideco drill pipe business realized a sharp revenue decline due to a combination of seasonality and COVID-19 related challenges. These challenges included the closure of one of our manufacturing plants for 22 days and the holdup of shipments at the border between Mexico and Texas. Despite softer-than-anticipated revenue, we realized a surge in orders during the early part of Q1, resulting in the highest level of bookings for this business since the fourth quarter of 2014.

The strong Q1 order flow, of which over half the bookings were for the U.S., supported the assertion we've made over the past several quarters that drill pipe inventories were unsustainably low for the then current levels of drilling activity. Unfortunately, with the recent collapse in the price of oil, we expect our recent orders and the drill pipe from stacked rigs to satisfy the bulk of the industry's need to replace worn-out pipe on the limited number of rigs that we'll continue to operate near term. Accordingly, the business unit is taking decisive actions, including shutting manufacturing facilities in France and Dubai to prepare for volumes that we anticipate will fall below prior cyclical low.

Our Tuboscope business experienced a slight revenue decline in both coating and inspection operations due to falling rig activity and COVID-19 related disruptions. With a sharp decline in customer activity, we anticipate that Tuboscope's operations will realize a sharp falloff in revenue once our existing backlog begins to thin out in mid-May.

Our WellSite Services business unit saw revenue decline 5% sequentially, driven by declining U.S. activity, COVID-19 related logistics issues that slowed certain international and offshore projects and the shutdown for our U.S. fluids business, an action resulting from in-depth returns analysis we've recently completed.

As we've previously described, we developed tangible plans for near-term improvement or slotted for divestiture or closure of businesses that do not meet our internal return thresholds. The recent significant deterioration in global market conditions has meaningfully reduced our tolerance for fixing operations, and we have accelerated plans to exit certain product offerings and markets over the next several quarters.

Over the past several years, our Wellbore Technologies segment has been relentlessly focused on improving operational and process efficiencies, developing technologies that materially improve our customers' economics and fixing or exiting product lines in markets that do not meet our returns thresholds. These efforts taken together with our customers' recent push to better align themselves with NOV, because they know we will be there to meet their needs regardless of market environment, will enhance the segment's ability to navigate through the challenges that lay ahead.

Despite the segment's solid positioning, its businesses are highly correlated to global drilling activity levels and is dependent on the ability to move its people and goods around the world. While the rapidly declining activity levels and the increasing frequency of COVID-19 related disruptions do not allow for a great deal of confidence in the precision of our outlook, our best current estimate is that the segment will realize a sharp sequential revenue decline in the mid-20% range with decremental margins in the upper 30% to lower 40% range as increasing pricing pressures offset additional cost savings.

Our Completion & Production Solutions segment generated $675 million of revenue in the first quarter, a decrease of $124 million or 16% sequentially. Continued weakness in the North American Completions Market, seasonality and logistical disruptions caused by the COVID-19 virus all contributed to the sequential decline. EBITDA fell to $71 million or 10.5% of sales. Decremental margins were limited to 20% due to ongoing efforts to quickly reduce costs and rightsize operations. Net bookings for the segment fell 33% sequentially to $335 million, yielding a book-to-bill of 81% and a backlog of $1.2 billion, down 9% from year-end 2019 levels. Last quarter, we expressed optimism regarding the order outlook for 2020 as our tendering activity and potential project pipeline was robust. Although our orders were in line with expectations due to strong order inflow in January and February, we had anticipated a bit of a pullback in Q1 due to the timing of various projects. However, the recent collapse in commodity prices has considerably altered our outlook for the remainder of 2020. While certain projects may still be awarded, we think most new FIDs will push into 2021, which will delay orders.

Revenue in our Production and Flow Technologies business unit declined 9% sequentially. Sales from the unit's production and midstream product offerings experienced double-digit percent decrease due to declining demand in North America and the postponement of deliveries resulting from the inability to complete final acceptance testing due to COVID-19 restrictions. The offshore-oriented components of this business unit collectively posted a sequential improvement by capitalizing on a healthy backlog built over the 4 preceding quarters. Much of the unit's backlog relates to LNG projects for which customers still express the intention to move forward. While new bookings were light in Q1 and while we anticipate significant deferrals of meaningful -- of a meaningful number of new project FIDs that we previously expected to occur during the course of 2020, we're working closely with several customers who remain confident their projects will proceed in 2021 and are asking us to help them use extra time to optimize designs through expanded FEED studies.

Our Subsea flexible pipe business realized a 22% sequential decline in revenue, primarily due to a reduction in deliveries and slower progress on certain projects. Bookings for the quarter were light, but the unit's healthy backlog should partially insulate the operation near term. While we still currently anticipate a slight uptick in Q2 revenue and orders, the outlook for late 2020 and for 2021 has become murky at best.

Our Fiberglass business unit posted a solid Q1 with only a slight decrease in revenue despite COVID-19 headwinds in China during February and March. Continued improvements in deliveries of large diameter composite pipe for water systems in the Middle East and U.S. was offset by mandatory facility closures in China. Orders for this business unit also remained solid with a 92% book-to-bill, including an additional $25 million in orders for marine scrubber equipment. Despite the business unit's solid backlog, we anticipate second quarter results will be hampered by the increasing frequency of operational disruptions, particularly in Malaysia from COVID-19 related facility shutdowns and shelter-in-place directives, which are causing delays of product installations in numerous jurisdictions around the world. We also expect these delays and weaknesses in industrial markets to cause customers to take a wait-and-see approach toward new orders.

Our Intervention & Stimulation Equipment business realized a 21% sequential decline in revenue due to reduced demand for completions equipment, seasonality and a few COVID-19 related logistical challenges that made customer final acceptance testing impossible. After several quarters in a row of strong coiled tubing equipment deliveries, revenue fell sharply for this product line due to these factors. However, our backlog of coiled tubing equipment for the international markets remains healthy, which could drive a sequential increase in revenue for this product line.

Even though we might achieve better results from our coiled tubing equipment product line and the broader Intervention & Stimulation Equipment business unit posted a 100% book-to-bill from healthy demand for wireline equipment destined for international markets, our international customers will not be immune from the rapid deterioration of the global energy markets. As a result, we expect the business unit to post another double-digit percentage decrease in revenue, and management is moving as quickly as possible to rationalize and rightsize their product offerings and manufacturing footprint. With the uncertain market backdrop and an environment of increasing frequency of COVID-19 related disruptions, for the second quarter of 2020, we anticipate revenue from our Completion & Production Solutions segment will decline 8% to 12% with decremental EBITDA margins in the mid to upper 30% range.

Our Rig Technology segment generated $557 million of revenue during the first quarter, a decrease of $202 million or 27% sequentially. EBITDA fell to $56 million or 10.1% of sales, representing 28% decremental leverage sequentially. The segment realized a sharp sequential decline in capital equipment sales as several previously anticipated equipment orders did not materialize. These deferred orders also led to a $65 million or 31% sequential decrease in bookings. Orders totaled $146 million, yielding a book-to-bill of 70%, and the segment ended the quarter with a backlog of $2.9 billion. Looking ahead, the order outlook has materially weakened due to the fall in commodity prices and ensuing decline in global rig activity. Customers are focusing on conserving cash wherever possible, and the recent momentum in demand for rig upgrade packages that was realized over the last few years is likely to come to a standstill for the time being.

We expect orders over the next few quarters to consist primarily of equipment and parts that are essential to keep active rigs turning as contractors focus on minimizing CapEx and preserving liquidity. Aftermarket revenue also experienced a double-digit percentage sequential decline. Bookings for spare parts were robust during the first 2 months of the quarter but fell sharply in March. As Clay mentioned, order intake through February was bolstered by customers working to mitigate potential logistical disruptions from COVID-19 by ensuring critical spares were readily available. Such disruptions did materialize and have increased in frequency as border restrictions, mandatory quarantines and general shutdowns handicapped the industry's ability to move people freely around the globe. To put this disruption in perspective, today, we have 39 service technicians that are working outside the borders of their home countries. Normally, we would expect to have around 400 technicians troubleshooting and fixing customer issues around the globe.

Fortunately, we're able to leverage our Tracker Vision augmented reality technology, that Clay referenced, to stream real-time audio and video from rigs to our subject matter experts anywhere in the world. Our professionals can then utilize augmented reality tools to provide specialized instructions along with visualizations to the rig contractors' personnel who can then make necessary repairs. In light of the weak market conditions, installed base has never been more important, and we expect our aftermarket business to be key in sustaining our Rig Technology segment's activity. Despite the recurring revenue nature of our aftermarket business and the segment's 86% weighting to international markets, no market will be immune from this downturn, and we expect minimal demand for new capital equipment sales. As a result, we expect revenue from our Rig Technology segment to be down 8% to 12% in the second quarter with decremental margins in the upper 30% range.

With that, we'll now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bill Herbert of Simmons.

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William Andrew Herbert, Simmons & Company International, Research Division - MD, Head of Energy Research & Senior Research Analyst of Oil Service [2]

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Thanks for the detail and the realistic outlook. Clay, a question for you. I was struck by the fact that you sort of issued the guidance internally for a very difficult 2 years, is what I heard correctly, with regard to your partners within NOV and your labor force on the one hand. On the other hand, I think you correctly talked about the damage that's being done to the supply chain in terms of the energy supply chain, the evaporation of Ford oil supply and the need for hydrocarbons going forward. So I would have thought that given the severity of the implosion in production, the damage to the upstream supply chain, with even modest reflating economic and demand growth next year, we would be in an expansionary mode for 2021. So I'm just curious as to your 2-year comment with regard to this is going to be a slog for 2 years.

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

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I hope you're right. To me -- what concerns me, and I don't spend a lot of time typically talking about the macro on these things, but what concerns me is 26 million Americans filing for unemployment. And I think the level of unemployment and economic uncertainty that has been injected into not just the U.S. economy, but developed economies around the world as a result of all of the countermeasures against COVID-19 means that we set ourselves up for a global recession. And I think the prospects of us bouncing quickly back out of that are going to be limited because I think folks that are -- have lost their jobs are going to be hesitant to go back to spending what they did prior. And so no one really knows, and I'll stress, I'm terrible at forecasting this sort of stuff. But I think that means that a recession that drifts on for -- on the order of 2 years or so means that we'll have suppressed levels of demand for oil through that time period. Ultimately, we are going to recover, and I think I was pretty emphatic in my opening statement on that. I don't know the timing, but we're bracing ourselves for longer and -- but I'd add, I hope we're wrong. I hope demand comes back strongly and intersects with supply, which is going to -- clearly going to be destroyed through 2020, like a spending and force shut-ins are going to see that, that happens.

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William Andrew Herbert, Simmons & Company International, Research Division - MD, Head of Energy Research & Senior Research Analyst of Oil Service [4]

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Got it. And as a -- yes, and as a global manufacturer, just given the dislocations that we're seeing, the continued and aggressive decoupling away from China for good reasons, are there any parts of your supply chain -- significant parts of your supply chain that need to be rewired and thus will mute the rate of profit recovery on a rebound in activity?

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

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That's a really good question. And what I would say, Bill, is that our -- overwhelmingly, our primary focus is taking costs out of our supply chain with respect to sort of hypothesizing some future Black Swan scenario where we're going to wish we had a different rewired supply chain, that's not really the immediate concern. The immediate concern is taking cost out to resize ourselves to the diminished view of -- that we see for demand in the coming 8 quarters. And so that's really what's guiding our actions rather than trying to, for instance, move away from China.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [6]

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And Bill, this is Jose. I'd also add that while we had our disruptions that certainly created challenges during the quarter, we have been and continue to be very thoughtful in terms of how we scale down the organization and how we position our manufacturing capacity around the world, and it has served us very well even during that very challenged quarter. So some additional costs incurred and some slight delays, but really, we were able to meet all major customer needs by rerouting our goods around the world using the redundancies that we do have within the supply chain.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [7]

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Yes, the scale of the organization, I think, gives us some flexibility that smaller enterprises might not have in dealing with that sort of things. So that's very helpful in something like this.

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Operator [8]

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Our next question comes from Tommy Moll of Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division - MD [9]

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Clay, I wanted to start on any anecdotes you could share from conversations with customers. I would assume that here in North America, the dialogue is pretty grim and that they're adjusting just like we see every week with the rig count updates, but really on the international side, how much visibility do you or they have into what the rest of this year could look like? And then on a related point, any update you could give us on any adjustments to planning for the Saudi JV?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [10]

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Good question, Tommy. First, in North America, yes, they're reacting -- I mean the reaction has been as swift as any I've seen in my experience with respect to laying down rigs as quickly as possible. Once a rig finishes drilling up a pad, they're getting laid down. The industry has never faced shut-ins like we are facing right now. And so no one's wasting any time. The request for discounts have been immediate. And so the business really is -- I think one of the respondents to the Dallas Fed survey said the business in North America is just shutting down. And it just kind of feels like that right now.

International, it's a little more measured, I think. I think we're definitely going to see an impact, but it's going to unfold a little more slowly. We are having conversations with our customers about their specific plans for projects. I'm not sure they know exactly how that's going to shape out. But generally, the -- we're hearing a lot of customers are planning on pushing back FIDs or projects they already haven't launched. The ones that they have launched, generally, we're hearing they intend to move forward with or going to go ahead and execute. And so we're pleased to have the backlog that we have. But I think Jose mentioned this in his prepared remarks that FEED studies, for instance, on projects internationally, we're in conversations with customers that are saying, "Hey, let's take a little more time and maybe do another iteration of looking at how we make the -- take costs out of this project or so forth." So our expectation is that international will be down, but not nearly to the degree that North America will be.

With respect to our Saudi JV, things are progressing well there. We got a bit of a late start on construction last year, but it's underway now. We're about 35% to 40% complete with construction. And although we've seen some COVID-19, a little bit of delays and disruption on the construction side of things in the kingdom, generally, that's moving forward and very excited about the prospects for that joint venture. Of course, just as a reminder for everybody else that, that joint venture and the build-out of a plant there in Saudi Arabia is tied to the $1.8 billion order that NOV secured for 50 land rigs. And I think our customer's expectation is to continue to push forward with that at -- as quickly as they can.

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Thomas Allen Moll, Stephens Inc., Research Division - MD [11]

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Clay, that's all very helpful. Shifting to a bigger picture theme here. Over the history of the company, you've been involved or emphasized North America land versus international land versus offshore to different degrees, different points and cycles. So as we go into this downturn and you're looking at what businesses to continue to invest and where to prune investment and potentially exit altogether, can you give us any examples of decision-making around those product lines and potentially, as those decisions may be impacted by how you think the recovery takes place and which markets you want to focus your exposure to as you said earlier, say, a couple of years forward from now?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [12]

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Sure. Sure. I think -- by the way, I appreciate the question because I think it emphasizes the diversity of products that we offer, the diversity of basins and places that we work. And I think diversity is hugely important as we move through a downturn, diversity and scale. And the short way of saying it is, we'll work anywhere that we can make money and a return on capital that we invest. But I think it's just being a prudent and responsible steward of company assets, we need to look at that portfolio from time to time and recognize that technology changes things, the customer practices change things, the outlook changes things. So Jose, for instance, referenced our drilling fluids business in the U.S. that we shutdown this -- we're in the process of shutting down currently. And part of our analysis there is that although we have terrific folks that work very hard in that business, it's very challenged from a competitive standpoint, logistics and scale matter there too. And since it's such a fragmented competitive landscape, it's very difficult there to earn an acceptable return on capital. That's the sort of process that we are going through with our portfolio and figuring out where can we invest to make the highest returns for our shareholders.

Finally, when we kind of look to the recovery, frankly, I think if the supply and demand lines for oil cross as quickly and as dramatically as they might, given the scenario that I was just discussing earlier with Bill, I could see basins all around the world begin to come back if we are fortunate enough to experience a strong commodity price increase that drives activity across the oilfield. So I think the fact that NOV supports all of these operations around the world, land and offshore, North American as well as international, production as well as drilling as well as exploration, I think that's a key strength of our enterprise. And investing within that framework, it always is a search for competitive advantage. Ultimately, competitive advantage is what drives returns on capital and so that's what we're seeking.

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Operator [13]

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Our next question comes from Kurt Hallead of RBC.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [14]

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Hope all your families are well.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [15]

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Thank you, and likewise. I hope everybody listening is doing well too.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [16]

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Clay, I always appreciate the perspectives that you bring and the insights and also appreciate the fact that you're willing to take a stab at how things may play out even if it's on a near-term basis. Just kind of curious as you kind of are navigating this challenging time. You talked about maybe working capital being -- generating free cash flow, but working capital being a little bit challenged in prior down cycle dynamics, NOV was able to generate substantial cash flow from working capital. So I was wondering if you might be able to kind of help us put that -- your commentary into perspective and how to think about maybe a working capital release in 2020?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [17]

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I'll hand it to Jose here in just a second. Before I do that, I want to say, I think our organization, through the last few years, because of the focus on working capital, is developing better and better processes and muscle memory around working capital. And that's driving better efficiency on working capital. But I'll let Jose address that.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [18]

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Yes. I actually think that's a really good -- that's the overarching theme. I think we have been incredibly focused on improving every facet associated with managing working capital across the organization. We've gotten much better at it, and that will serve us really well as we enter into this much more challenged operating environment. But there are some things that are certainly outside of our control. And so as I highlighted, the customer base is certainly much more stressed, and they're going to be doing what they can in order to maximize their liquidity. We also have our business mix that's going to shift more international -- to international markets where the payment terms are generally a little bit longer. But basically, the way that we kind of see the next several quarters, as we certainly expect working capital metrics overall to deteriorate. And I think as it relates to looking at DSOs, the 2015-2016 time period is probably a reasonable benchmark for how things could progress over the next several quarters. But we certainly don't expect inventory turns and overall working capital as a percentage of revenue run rate to deteriorate to those levels in the past because of our much improved processes and management. And at the end of the day, we're hesitant to put a number out there for you guys because there is such a lack of visibility as to how the back half of the year will play out. But as you highlighted, with the contraction of the top line in that type of environment, we're usually able to generate some good free cash flow.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [19]

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I appreciate that incremental context. And maybe just as a follow-up. So Clay, you have been able to side step the empire-building temptation that has stretched the balance sheets of a lot of other companies. So kudos to you for doing that. As you kind of look out beyond the 2020 dynamic and you're pruning your portfolio, I was wondering if you could give us some insight as to what areas NOV could potentially improve or enhance their existing position through M&A once dynamics start to normalize?

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [20]

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Yes. Well, Blake is sitting here and he runs that effort for us. But what I would tell you is that we continue to look at opportunities, we continue to think through our strategic positioning and our competitive advantage that drives returns on capital and we continue to look for ways that transactions could potentially enhance that. But we also recognized we're in the middle of a heavy lift on taking costs out of our organization and scaling to kind of fit the near-term level of demand. And we're going to be very careful before we add more complexity to that effort or risk to that effort by piling on an acquisition. We have done small acquisitions. We did a couple last year. They were very strategic, great fits and are executing well on those. But we're just recognizing the value of the capital that we have access to and that, that value will increase in coming quarters and really try to make sure that we get that right. So I think M&A, it's played a big role in our past in helping build the company in the first place. And it's going to play a role as we evolve into the future. But we're kind of passing through this inflection point right now. It's going to bring asset values down. It's going to make opportunities more and more attractive. And so we're monitoring that closely.

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Operator [21]

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Our next question comes from Sean Meakim of JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [22]

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Clay, I was hoping to get more detail on the cadence of the cost out as we go through the year at $375 million across 3 quarters. The incremental in 2Q is pretty high, but of course, given how quickly revenue is falling, it's tough to match the cost in that quarter. Just curious how the back half of the year looks in terms of realizing those savings? And would you characterize them as principally fixed?

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

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Yes. First, on the pace, the answer as quickly as possible. As you correctly point out, revenue is moving down rapidly, and we're working to try to adjust to that as rapidly as we can. And so quarter-by-quarter, we'll continue to update you. But there's a lot -- as you can appreciate, we went from $230 million in our model to $625 million in our model. And there's a lot of moving pieces with that. But I think that our team gets it. We're spurring that as quickly as we can.

With respect to the nature of the cost savings, what I would say in round numbers, it's roughly half fixed, half variable. With a little more detail around that, about 35% of the overall cost savings effort pertains to direct labor; a little bit less than 50%, I think 47% is indirect labor plus overheads plus corporate efforts plus some benefits changes; and then the -- about 8% or so pertains to facilities leases and facilities fixed costs; and then their balance, which I think is about 11% or so, is -- not sure if it's fixed or variable, things like travel, entertainment, trade shows, that sort of thing that we're reducing. So if you kind of sort through all of that, I would say that's roughly half fixed, half variable. Another way to look at it is, so far, about 1/3 of it has been SG&A related and about 2/3 of it has been cost of sales related based upon the $21 million year-over-year improvement in SG&A that we -- that you see on our income statement.

Does that answer your question, Sean?

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [24]

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Very much so. Yes, that was really helpful. I appreciate that. Somewhat related, free cash was a little light relative to what would be implied by EBITDA and working capital benefit. Just the cash flow statement is condensed in the release. It would be great if you could just maybe help us with restructuring cash impacts in the first quarter and maybe what will you -- how would you characterize cash-out kind of one time associated with the restructuring as you go through 2020?

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [25]

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Yes, Sean, it's Jose. Yes, so I guess as I turn to Q1, there certainly were some minor cash costs associated with the cost-out program that will continue through the course of the year. And also with some of the restructuring and impairment charges, we did have some noncash charges that related to inventory as well, which also impacted the quarter. But if you compare this Q1 to the prior 2 Q1s, we actually had improvement in the free cash flow. Typically, Q1 has a lot of seasonal type expenditures that flow out making that quarter a little bit more challenged. So we certainly anticipate improvement as we move into the remainder of the year. And typically, from a cash cost associated with some of our restructuring charges, you can look at between 15% to 20% of the cost savings -- the annualized cost savings basically being our cost or real cash costs associated with getting those costs out of the system.

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Operator [26]

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Our next question comes from George O'Leary of TPH & Company.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [27]

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Just given how important Wellbore Technologies has come -- become to the EBITDA stream, curious given your prepared remarks as you talked through that segment's results and kind of the pruning of the portfolio and decisions to exit businesses and regions as well, I think if I heard that right. The decrementals are expected to be relatively elevated in the second quarter, historically, that's a high incremental decremental business. But I was wondering if you could talk to beyond Q2, and I realize if revenue falls off really sharply, that's a totally different discussion. But if there's an opportunity to lower those decrementals, again, absent a sharp revenue fall off as we progress through the year for that business in particular?

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [28]

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Yes. George, it's Jose. I'll take a stab at that here initially. And -- as we were, I think, kind of touched on in one of the prior questions, when revenue does decline so quickly and so rapidly, it's very difficult for the cost-out efforts to keep pace with those reductions. And even last quarter, as we were talking about Q1 of this year, we -- due to the timing of some of those cost-out efforts, we expected a little bit of a slowdown, which that combined with the shortfall off in revenue that we saw from Q4 to Q1, led to some fairly high incrementals. And if you sort of take the midpoint of the guidance of roughly 25% decline from Q1 to Q2, that's another very challenged environment in order to maintain relatively low decrementals. So certainly, as we start getting closer to bottom and things start to level off, some of those cost savings will catch up, and we certainly expect those decremental or incremental margins to improve considerably. But overall, that segment has done a phenomenal job, really since the depths of Q2 of 2016, which is sort of the prior cyclical low, where they -- from trough to the recent peak, they delivered roughly 57% incremental margins. We gave the example earlier about the year-on-year comparison. Q1 of 2019 to Q1 of 2020 is reflective of about $110 million of cost savings that they've achieved, which really mitigated decrementals to 12%. So they're doing a phenomenal job and they will continue to do that as we move forward in time.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [29]

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Great. That's a very helpful color, Jose. And then just on your last call, you guys noted that you closed, I think, 483 facilities since 2015. And you kind of talked about things like renegotiating real estate costs with your landlords and things like that. But how much is left to do on the facility closure or consolidation front as you contemplate the $625 million in cost savings program? How much is really left to do there? It seems like you guys have done a lot of work on that front already.

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

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Well, we have, but again, don't -- I mean we're resolute in doing whatever we have to do to adjust to the marketplace. So we do have additional facility closures planned and have made some announcements around those. I think we have 29 closures that are pending right now and 27 that were actually closed in the first quarter. So -- I mean we're doing whatever it takes to make sure that we're sized to continue to generate as much cash and EBITDA as possible through the downturn.

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Jose A. Bayardo, National Oilwell Varco, Inc. - Senior VP & CFO [31]

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George, I'd also add that we've certainly done quite a bit in order to -- to this point, in order to consolidate some of our key manufacturing operations and by doing that improving efficiencies. A lot of that has been done. There's more left to be done, as Clay touched on. There's still a number of facility closures that are underway. I mentioned a couple of manufacturing facilities that we're closing and consolidating in my prepared remarks. But one of the other things that we have available to us is that we still have a large number of service, repair, aftermarket type facilities around the world which are easier to scale up and scale down. And when the market gets challenged, particularly in certain markets that are no longer meeting our returns thresholds, those are some of the targets that we started going after as well. But doing it in a very thoughtful manner to make sure that we continue to take care of our customers and can scale back up quickly and efficiently when we're called upon to do so.

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Operator [32]

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At this time, I'd like to turn the call back over to Clay Williams for closing remarks.

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Clay C. Williams, National Oilwell Varco, Inc. - Chairman, President & CEO [33]

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I want to thank all of you for joining, both investors as well as any employees that might be listening. And as Bill Herbert brought up early in the questioning, we do believe we're in for a very challenging 2-year period ahead of us. But there is one thing that I really think is important to emphasize to everyone listening, and that is that NOV really is built to weather this, the diversity of our business model along multiple dimensions, our access to capital, our strong balance sheet, but above all, just could not be more proud of the employees of NOV who are well practiced in controlling costs when times get tough. So thank you for all that you're doing. Please, everybody remain safe. And we'll speak to you again next quarter. Take care.

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Operator [34]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.