DNOW Inc.

Good morning and welcome to the third quarter 2021 Distribution Now Earnings Conference. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session during which you may dial star 1 if you have a question. I will now turn the call over to Vice President of Digital Strategy and Investor Relations, Brad Wise, and you may begin, sir.

Well, good morning. Thank you, Brandon. And welcome to Now, Inc.' 's third quarter 2021 earnings conference call. We appreciate you joining us and thank you for your interest in Now, Inc. With me today is David Cherochinsky, 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, and 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 10-K and 10-Q that NOW, Inc. now has on file with the U.S. Securities and Exchange Commission for a 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 or 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 the site for the next 30 days. We plan to file our third quarter 2021 Form 10Q today, and it will also be available on our website. Now, let me turn the call over to Dave.

Thanks, Brad, and good morning, everyone. I'd like to begin this call with a big thank you to the thousands of D-NOW women and men around the world who successfully connect the manufacturers we support to the customers who rely on us to power the world for a sustainable future. Things are challenging on many fronts, the COVID surge, labor and material shortages, elevated transportation costs, and changing political winds, among other things. Despite these factors, we performed very well. We've seen strong demand this quarter, especially in North America. Our service to customers has been exceptional. We are leveraging our scale, modernizing our geographic footprint, and demonstrating agility as we keep the customer at the center of every dollar we invest. Our goal is to always be in an advantaged position to help our customers achieve their goals and solve their problems. While the supply chain environment is stressed, we are confident in our skills to respond to the evolving dynamics. In the face of labor and material shortages, we are providing superior service and helping our customers minimize disruptions. we are investing in inventory to seize growth as the market expands further. While we navigate tight supply chains and labor shortages quite well, these disruptions impacted revenues a bit more in the third quarter of 2021 than in the previous quarter, especially in the area of steel pipe and for products in US process solutions. These trends seem likely to endure in the short term. To address these, we are leaning on technology alternative supply sources, and branch initiatives to improve productivity and order fulfillment. The degree and pace of recovery is contingent upon COVID impacts, customer budget discipline, ESG initiatives, and availability of capital, labor, and products amid the lingering supply chain bottlenecks. We have taken action in a transforming market, one where we see a bright future for D-NOW and our customers. Domestically, the public EMP spending abstinence has emboldened private EMPs to spur operations, driving nearly 80% of the U.S. rig count growth in 2021. 3Q21 was a really good quarter, where we achieved 10% sequential revenue growth, beating our mid-single-digit revenue guide. We achieved a record quarterly gross margin percent that drove greater-than-forecasted flow-throughs on relatively flat warehousing, selling, and administrative expenses. Later, I'll close with how pricing and gross margins are driving our strategy. We delivered $15 million in EBITDA, or 3.4%, on $439 million in revenue. For context, looking back at another recovery year, for the full year 2017, D-NOW generated more than $2.6 billion in revenues but just $7 million in EBITDA during that full year. As a point of comparison, we generated $439 million in revenues in 3Q21 and more than twice the EBITDA dollars on one-sixth the revenues when compared to the full year of 2017. This is a significant achievement and a major pivot, allowing for greater incrementals, a leaner supply chain, and reduced inventory risk as a byproduct of our fulfillment model modernization. In the worst downturn in history, we acted quickly and adroitly. These achievements are a testament to our employees' hard work and our management team's focus and determination in strategic execution by resizing D-NOW and reshaping our strategies for current and future markets. We achieved these results despite some of our revenue engines not firing on all cylinders. For example, projects in the U.S. midstream market have remained relatively muted. International growth continues at a slow pace as the pandemic impacts the demand for oil and gas, thus keeping some OPEC Plus supply off the market. And a number of carbon management energy transition projects are just in the early planning stages where DENOW possesses a number of PVF and engineered solutions which offer future revenue opportunities. As one or more of these cylinders begin to fire and activity materializes, which I am confident they will, this will be an accretive tailwind to DENOW's revenues and bottom line results. We believe this sets us up nicely for what we expect to be a much stronger 2022. Now some comments on a regional basis. In the U.S., revenue was up $16 million sequentially. U.S. energy revenue increased sequentially due to drilling and completion activity and favorable margin contributions, primarily from steel pipe inflation. The recent increase in land-contracted drilling rigs was dominated by private oil and gas producers during the quarter, where DENI was actively targeting customers and making positive inroads. We experienced broad product line sales growth across the U.S. as drilling, completions, gathering lines, and tie-ins were sold into the oil and gas producing regions. A notable portion of drilling programs are targeting well locations in proximity to facilities that have additional processing capacity, meaning a portion of our producer customers are spending lower capex per well site than they had historically, at least for now. Market share gains in the quarter included a major operator in the Permian, whose rigs remained flat sequentially, but revenue increased substantially from central tank battery builds. We expanded PVF sales through several EPCs for tank battery billets in the New Mexico-Delaware play. Also during the quarter, with a focus on private operators, we executed several MSAs, which will open future growth opportunities for their Permian assets. We increased market share with PVF for facility billets for a private producer and several line pipe sales with a gas utility company. In the downstream sector, we provided PVF to several chemical processing companies for plant turnarounds and a major valve upgrade project at an inland refinery. In highlighting how customers are using our mobility-based technology solutions to drive point-of-sales efficiencies, we implemented a customer onsite inventory solution where customers access our D-NOW app from their mobile phones to procure material. Customers can also connect with our local branch on the mobile app to place orders for pickup or delivery. Shifting to U.S. process solutions, revenue expanded sequentially from increased completions activity with drilling operations and duct drawdowns yielding higher demand for our fabricated engineered equipment packages, in addition to punk packages for fluid handling. Engineered packaged units were delivered to the Permian, Eagleford, Rockies, Powder River, and Bakken plays. Products include a variety of ASME pressurized vessels, including heater treaters and separators and oil transfer skids. Activity in the midstream and water management markets is increasing as demand for LAC units, pipeline blending skids, and water transfer units increased during the quarter. In the downstream sector, we provided a number of pump packages and refinery applications located in the northern Rockies and delivered a large order of valves tied to a soda ash mine project in Wyoming. On the municipal waterfront, we are seeing increased levels of quote activity for pump packages as projects in this end market begin to gain traction. On the aftermarket side, we are seeing demand pick up for our field service offerings on pumps and air compressors. Our field service work drives parts and labor sales, which delivers strong margins to our base distribution business. In Canada, third quarter revenue was $68 million, a sequential increase of $17 million, or 33%, amid continued share gains and the market emerging from a seasonal breakup. Western Canadian Select Heavy Blend averaged $57 a barrel for the quarter and is fostering bullish sentiment for increased capex budgets and project activity for key oil sands producers. In addition, with improved natural gas prices, the macro sets up well for more projects to drive conventional and midstream growth. Our pre-assembled kit packages for wellhead hookups and tie-ins led to notable gains in the quarter with many of our customers. Finally, we continue to see success with our valve and actuation product line, winning business with multiple EPCs we have targeted with a number of major EMP and midstream operators. For international, in the third quarter, revenue was up 6 million sequentially, or 11% to 59 million. International drilling activity is beginning to pick up as OPEC plus spare capacity begins to narrow as demand for energy increases. D-NOW is positioned well in key areas to take advantage of increased drilling activity through a number of our drilling contractor frame agreements. Some notable international wins include delivering electrical, PPE, and MRO products on various project orders to a major oil and gas upstream operator in Iraq. In the CIS region, we were successful in receiving project orders for PPE in Kazakhstan while obtaining notable wins for PFF with an EPC in Russia. In Indonesia, we provided valves to an EPC for a project at a downstream petrochemical facility. In Australia, wins include shutdown valves and spares for a major international oil and gas company, in addition to project awards for control valves for a major international gas producer. McLean International delivered electrical cable for an onshore gas expansion project for an Australian-based engineering and construction firm and an electrical cable order for solar panels to a customer in Australia. We've been busy securing future business by executing a number of key frame agreements for our electric business that includes a three-year agreement for a major oil and gas producer operating in West Africa and a five-year agreement with a global EPC. These agreements provide future opportunities to secure meaningful electrical products revenue as projects and MRO business accelerates. In Brazil, we delivered a large valve order from an EPC on an FPSO project producing for a major national oil company. We also leveraged our total valve solutions offering, including our digital valve asset management solution with an offshore Brazilian producer capturing valve orders in addition to notable wins from several offshore drilling contractors. Now I'd like to address the impact that global supply chain delays and inflation are having on our business. With our PBF product lines, we maintain a global sourcing strategy where we source from several preferred domestic and import manufacturers, which allows us the option to proactively manage our inventory availability to meet customer demand in times of supply chain disruptions. Our procurement and sourcing teams have done an excellent job ensuring high product availability during these logistical challenges. For steel pipe and some components that are assembled as part of our engineered process, production, and pump packages, We are experiencing product delays in some of our packaged offerings, pushing approximately $5 to $10 million in 4Q21 orders into the new year. Moving to our Digital Now initiatives, in terms of our digital commerce channels, we continue to increase customer adoption, now eclipsing 44% of SAP revenue connected to our digital channels during the third quarter. We onboarded numerous B2B e-commerce customers across midstream industrial and service companies this quarter. We continue to work with our digitally integrated customers to further enhance their e-commerce experience by optimizing their product catalogs and developing customized workflow solutions through our shop.dnow.com platform. Our technical sales team and our U.S. process solutions business is leveraging our eSPEC product configurator tool to capture revenues. During the quarter, we saw an increase of active users by 48%. And recently, we enhanced the user experience by incorporating three-dimensional imaging and the ability to view our package units in an augmented reality environment. This allows our customers to better visualize what the completed package would look like from a 360-degree vantage point. We are using eTrack, our asset management lifecycle tool, to improve the accuracy of customer-owned equipment counts, to enhance traceability and reduce labor costs associated with required monthly yard reconciliations. We are using ETRAC within our materials management customer engagements, enabling higher productivity and driving more value for both parties. And now I'd like to touch on a few comments related to energy transition. As we have seen during the third quarter, the elevated price of oil and gas is a result of increasing demand for energy on supply that requires continued investment to expand. For D-NOW, we are a critical part of enabling our customers' ability to safely and efficiently produce and transport energy to market. The products we distribute, combined with our highly efficient supply chain services solutions, helps our customers achieve lower cost production when producing and transporting oil and gas. We are investing in expanding our solutions to help our customers reduce greenhouse gas emissions as well as solutions around carbon capture, storage, transmission, and management. In the third quarter, we used our eSPEC software to drive more meaningful conversations with customers to reduce greenhouse gas emissions, noting specific value tied to compressed air system solutions, which offer direct replacement of methane gas venting systems. In one example, we provided air compressors and dryer equipment packages to producers who are committed to reducing greenhouse gas emissions from gas pneumatic devices, replacing them with compressed air systems. This is a great example of how D-NOW is able to improve our customers' ESG profile by helping them meet their emission reduction targets. Additional emission reduction solutions we offer our customers focus on upgrading pumps and pump seals to minimize leaks and greenhouse gas emissions and tankless tank battery designs. We are collaborating with producers on carbon dioxide, direct air capture projects, as well as dedicated CO2 capture and transmission projects. So we are excited about our core markets and equally excited about the emergence of new end markets, which enable D-NOW to expand our top line into the future. With that, let me hand it over to Mark.