DNOW Inc.

Welcome to the second quarter 2021 earnings conference call. My name is John Alb, your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If you do have a question, press star then 1 on your touch-tone phone. And now I'll turn the call over to Vice President, Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Well, good morning, and welcome to Now, Inc.' 's second quarter 2021 earnings conference call. We appreciate you joining us and thank you for your interest in NOW, Inc. With me today is David Cherchensky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the Distribution Now and D-NOW brands. You'll hear us refer to Distribution Now and D-NOW, which is our New York Stock Exchange ticker symbol, during our conversation this morning. Please note that some of the statements we make during this call including the responses to your questions, may contain forecasts, projections, and estimates, including but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume that these forward looking statements remain valid later in the quarter or later in the year. We do not undertake any obligation to publicly update or revise any forward looking statements for any reason. In addition, this conference call contains time sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest forms 10K and 10Q that NOW, Inc. has on file with the U.S. Securities and Exchange Commission for more detailed discussion of the major risk factors affecting our business. Further information, as well as supplemental financial and operating information, may be found within our earnings release on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP, You'll note that we also disclose various non-GAAP financial measures, including EBITDA excluding other costs, sometimes referred to as EBITDA, net income excluding other costs, and diluted earnings per share excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release. As of this morning, the investor relations section of our website contains a presentation covering our results and key takeaways for the quarter. A replay of today's call will be available on our site for the next 30 days. We plan to file our second quarter 2021 Form 10-Q today, and it will also be available on our website. Now, let me turn the call over to Dave.

Thanks, Brad. Good morning, everyone, and thank you for joining us. The second quarter marked another strong quarter for distribution now. From a top-line perspective, while global rigs in the quarter were unchanged compared to the same quarter in 2020, our revenues grew 8%. Sequentially, global rigs increased 2%, and our revenues grew 11%. Gross margins on the back of one Q21 record highs and against our expectations of a modest contraction due to increased project activity and downward pressure from Canadian breakup, gross margins again reached a new high of 21.3%. It's easier to grow revenues by conceding price. It's harder to grow the business and improve gross margins at the same time, yet we did so for a second consecutive quarter. Moreover, 2Q 2021 marks the third sequentially quartered quarterly market expansion since the 3Q 2020 bottom, where US rigs had declined by two-thirds from the first quarter of 2020. The spending discipline exhibited by our customers, which limits their purchases and in turn our revenue opportunities in the short term, also moderates the extreme volatility we experience through the cycles. Customer spending restraint curbs the feast or famine shocks our industry has experienced historically. enabling better inventory management and reduced product obsolescence, inevitably resulting from the wild swings a lack of spending discipline creates. In 2020, our push was to recompose the company amid the steep decline in market activity. While we have work left to do to align our cost structure to our strategy and to the market, the focus in 2021 is prioritized around revenue retention, market share gains, end market diversification, and inorganic expansion. We believe the restraint exhibited by public operators lays the groundwork for expanded domestic rig activity for 2022, as E&P balance sheets improve this year, providing more opportunity to finance capital investment. This environment sets up well for D-NOW if demand continues to recover. As part of the end market diversification strategy, We are tapping into municipal water and mining customers while targeting growing markets like carbon capture, renewables, and hydrogen tied to a shift in capital investment towards the energy transition movement. We are designing for the future fueled by a strong balance sheet. We are leveraging technology, application know-how, and streamlined supply chain and technical process workflow to enhance our solutions and drive incremental sales of the products we offer to achieve levels of differentiation in the market. We are focused on delivering value to our customers and applying inventive solutions while diversifying our end markets. Now to a regional look. In the US, revenue was up 44 million sequentially or 17%. US energy revenue increased sequentially due to increases in drilling and completions activity. We expanded sales with EMP operators driven by growth in spending by some of our largest customers and due to rigs being added by private operators. Notably, revenue gains with private EMPs outpace sequential rig additions for public companies as most publicly traded operators held to their capital discipline. In the Rockies area, we expanded our relationship with an independent energy company who uses CO2 captured from industrial resources that would have otherwise been vented into the atmosphere. In the DJ Basin, we expanded PVF market share with a regional independent on new facility construction projects. And in the Bakken, we provided PVF for several new tank battery builds for an Oklahoma-based independent oil producer. Other key wins included growing sales with a large regional operator in West Texas, providing PVF material for multiple projects and maintenance on a variety of facilities centered around tank batteries. In the Northeast, we delivered line pipe orders to regional gas utility customers, as well as PVF for wellhead hookups to gas operators in the Ohio Valley region. In the midstream sector, we provided valve solutions for a large regional petroleum products pipeline, leveraging a new valve supplier partnership targeting midstream liquids applications. In South Texas, we saw sequential growth from public and private EMPs as activity ramped up producing orders for PVF for tank batteries and flow lines, while midstream companies acquired line pipe for gathering lines and actuated valves and fittings for transmission tie-ins. In the southeast, we secured line pipe orders from an offshore marine transportation and logistics company, as well as provided fiberglass pipe for flow lines to a Haynesville shale operator. We captured revenue gains with our large integrated supply customers, Revenue was driven by increased winterization projects in the Bakken, plant turnarounds, day-to-day business associated with drilling programs, increased level of central tank battery builds, and large line pipe orders for gathering systems. For workover rigs, our workover trailers enabled our customers to maximize inventory availability and eliminate downtime associated with stockouts. while using our mobile app to acquire MRO products that deliver cost savings and efficiency gains for the operator. At U.S. Process Solutions, revenue expanded sequentially with increased completions activity from drilling operations and duct drawdowns yielding higher demand for our fabricated engineered equipment packages in addition to pump packages for fluid handling. We are seeing an increase in customer interest and order wins for our fabricated equipment solutions. Activity in the corridor was primarily focused in oil producing regions, while diversified end market business was captured in the midstream and municipal water markets. Key wins included 15 production separators and vessels for the Powder River Basin for a large independent EMP operator. and multiple air compressor units as operators seek to eliminate the venting of gas from direct gas compression, replacing old compressors with much lower emission compressed air systems in an effort to support their ESG initiatives relating to lowering of greenhouse gas emissions. Our investment in digital solutions is bearing fruit. Using our e-spec engineered equipment configuration and budgeting tool, we were able to successfully secure an order for 90 air compressor units from a large independent EMP operator. eSPEC enabled a richer contextual discussion with the customer, providing enhanced configuration and pricing options that added value through a compressed sales order cycle. On the package pumping unit side, we were successful in a variety of applications including water handling, transfer, and treatment applications for non-oil and gas markets related to waste management and industrial water treatment. In the renewable space, we provided pumping solutions to geothermal power plants and also expanded into the recreational market where we delivered water handling equipment for snow making applications at ski resorts. And we deployed our pumping rental fleet assets for a regional operator in the Midland Basin used to protect child wells while parent wells are drilled to mitigate subsurface communication. With increasing flows of produced water, we expect operators to continue to turn on pump rental services to support the disposal capacity increases. As completions grow and saltwater disposal activity increases, the deployment of D-NOW's mobile horizontal pumps will ensure the operational support that's needed when disposing of newly produced fluids. In Canada, the second quarter revenue was $51 million, a sequential decrease of $7 million, or 12%, better than what we normally experience. Leveraging a new supplier relationship strengthened our value proposition in several focus areas for pipe fittings and flanges, or PFF, for a sourcing strategy that resulted in several key project wins. Building on the success of our sourcing initiatives, we established a new partnership on valves that increased our market competitiveness in several material types that produced wins during the quarter. This success is a direct result of strategic sourcing where being selective and partnering with top tier suppliers drives market share gains. During the quarter, we extended a two-year PFF agreement with a top 20 Canadian customer, expanding the agreement to now include valves. Another project win during the quarter included large actuated valves from an EPC for a major operator used in the bitumen extraction process in the oil sands market. With one of our top customers, we expanded market share in our artificial lift product line and captured a variable frequency drive automation project for our automation product line. We continue to capture market share through leveraging our service model and technical application support with EPCs. notably one in a large PFF project for an operator who we hadn't historically participated with in their day-to-day business. Furthermore, we renewed a key fiberglass pipe contract with the top customer and delivered flow lines and tie-ins to an oil gas operator's mature oil asset. For international, in the second quarter, international revenue was up $2 million sequentially, or 4%. recoveries continue in Australia, Asia, and Latin America. In Australia, orders increased from a major offshore drilling company with several rigs contracted for a large domestic natural gas producer. In Singapore, we secured a notable project valve order for a refinery customer. In Asia, with the expansion of our electrical cable product line, we onboarded a new supplier we generated new business to an industrial automation fabricator who produces assembly solutions for traditional and electric vehicles. In Latin America, we leveraged our valve solution offering for offshore producing assets from a Brazilian operator. In Europe, we were successful in extending a three-year electrical MRO agreement with a large independent oil and gas company, and we secured a three-year contract award for MRO material for a large gas producer in the North Sea. We want a valve and electrical project in Europe that will start to deliver later this year for a state-of-the-art steam and power generation facility at an integrated refinery and petrochemical complex. This new business expands our end market diversification in the downstream sector internationally. And before I turn it over to Mark, I want to discuss a few points with regards to inflation and its impact on our business. We are seeing inflationary pressures on most of the product lines we offer. driven by a combination of tight steel and resin markets exacerbated by tight labor markets and rising transportation costs while lead times continue to lengthen. Additionally, importers of finished goods and raw materials have been diligent in pushing through increased ocean transportation costs. Pipe prices began to increase in late 2020 and have continued to move higher. This has been caused by an increase in OCTG demand, the primary product pipe mills produce, and a tight scrap and iron ore market. Behind this, the broader steel markets have seen a rather dramatic increase in demand from all other sectors, such as the industrial and housing markets. U.S. inventories of products we provide were much higher than normal in 2020 and have come down substantially. This includes our manufacturer's raw and input material stock, as well as with and finished goods. The majority of our suppliers are still delivering reliably, but lead times have increased and some gaps on certain products have become more prevalent. With that, let me hand it over to Mark.