DNOW Inc.

Welcome to the now incorporated fourth quarter and full year 2021 earnings conference call. My name is Cheryl and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question, please press star then one on your touchtone phone. I will now turn the call over to Vice President, Digital Strategy and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Thank you, Cheryl. Good morning and welcome to Now, Inc.' 's fourth quarter and full year 2021 earnings conference call. We appreciate you joining us and thank you for your interest in Now, Inc. With me today is David Cherichinsky, 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 the outlook of the company's business. These are forward-looking statements within the meaning of the U.S. federal and securities laws based on limited information as of today, which is subject to change. They are subject to risk 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 to you to our latest Forms 10-K and 10-Q that NOW, Inc. 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 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 US GAAP, you'll notice 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. In an effort to better align with management's evaluation of the company's performance and to facilitate comparison of our results to those of peer companies, beginning in the fourth quarter and full year ended December 31, 2021. EBITDA excluding other costs excludes non-cash stock-based compensation expense. Prior periods presented have been adjusted to conform with the current period presentation. Please refer to a reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure and the supplemental information available at the end of 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 and full year 2021. A replay of today's call will be available on the site for the next 30 days. We plan to file our 2021 form 10K 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. On our earnings call one year ago, as we were emerging from a year when the industry had experienced the worst market conditions, D-NOW responded swiftly and resolutely to defend its bottom line and lay the groundwork for prosperity in the future. We believed then that the market and our customer spending habits had fundamentally changed, demanding decisive action to redefine our supplier, sales, and customer engagement playbook and adjust our operating model to thrive as the economy began to recover. Downturns motivate change, and I sit here this morning amazed at how the highly talented, caring, customer-focused women and men of D-NOW have not just embraced, but have driven it. The results of our decisions these past two years are evident, not only in the night and day improvement in financial performance, but in the competence, enthusiasm, and confidence in our team that provides superior solutions our customers crave in a supply chain-stressed environment. During the first quarter of this year, we began operations at our new Permian Supercenter in Odessa, Texas. This facility expands our position and investment in the heart of one of the busiest oil-producing regions in the U.S. With the formidable presence of our energy locations and the complementary asset strength of Odessa pumps, FlexFlow, Power Service, and TSNM Fiberglass, strong, valuable, customer appealing names fortifying our brand in Permian. During this quarter, we plan to open a new Express Center in the area to support our customers as their drilling plans ramp up. This location will be primarily supported by the Supercenter as a means to regionalize fulfillment and drive efficiencies and deepen intimacy with target customers. Now moving on to our results, fourth quarter revenue was down 2% at $432 million at the better end of our guide provided on the last call. For the full year of 2021, revenues were $1.632 billion. Compared to the prior year, 2020 revenue grew $13 million or 0.8%, which is notable considering the strong $604 million 1Q20 pre-COVID print that contributed 37% of total 2020 revenue. Said another way, ignoring the first quarter of each year, for the nine months ended December 31, 2021, revenue was up nicely by $256 million or 25% from the same period a year ago. In 4Q21, gross margins expanded again to a record high of 23.4%, up 150 basis points sequentially. This is the fourth consecutive quarterly record for gross margins, and full-year 2021 gross margins of 21.9% set a record high as well. We are in an inflationary environment, and we benefit from that, but this performance was the result of a careful selection process where we have cultivated relationships with reputable suppliers who make good products and respect and reward reciprocity, as we do. The more purchases we can corral and allocate to our supplier partners, the more we benefit in terms of product availability, return privileges, and product costs. And the more our customers benefit from availability in a stressed replenishment environment. And because we are selective about which product lines, businesses, locations, and suppliers will support and customers will pursue, we are able to meaningfully improve product line pricing in the overall mix of product margins as we favor the more lucrative ones and elevate prices or pass on the less lucrative ones. Now some comments on a regional basis. For US Energy, customer capital discipline continues to be a major driving factor on our top-line performance as public operators maintain production and return cash to shareholders. As we have commented on our previous calls, the behavior of the public operators has emboldened private oil and gas producers to lead the rig count growth. During the quarter and similarly throughout 2021, we have continued to target and grow share with private operators by providing pipe valves and fittings for the wellhead hookups and tank battery facilities. Mutual success continues with our integrated supply chain services customers as we deliver additional value-added services that help our customers lower lifting costs and deliver on their production plans. As an example, we're seeing gains in our work over rig materials management program in support of several key EMP producers on increased maintenance capex activity. Fueling growth into 2022, we secured several new PBF contracts in the quarter, including a large independent producer with assets in the Permian, as well as a direct lithium extraction business supply agreement for an operation that has potential to scale from the initial phase. In the southeast, we received orders from an independent shelf Gulf of Mexico producer whose flow line assets were damaged from Hurricane Ida last August. We also provided PVF for several compressor station repairs also attributed to hurricane damage. We experienced an uptick in activity, securing orders for three well pad facilities in the gas-producing Haynesville area from a large independent producer. Sequential midstream sales grew, and we expect to see continued momentum as drilling and gathering systems increase midstream takeaway capacity utilization, driving more investment in midstream maintenance and CapEx projects. Our midstream customer spend has been more focused on natural gas and associated produced water projects, a pivot from previous quarters. In the Marcellus, Utica, and Haynesville plays, we supplied well-connected skid fabrication kits, and launcher receiver packages for several gas producers. We supplied actuated valves on several NGL transmission line extension projects where we provide technical support on product applications and field service support for the mounting, testing, startup, and commissioning of our valves. We provided line pipe, actuated valves, and fittings and flanges for a number of gas utilities in the Midwest and Rockies. Shifting to U.S. process solutions, we observed some of our customers favoring drilling and completing infill wells that have been minimizing demand for our rotating and fabricating equipment due to existing transfer and processing capacity. However, we are starting to see increased orders as customer drilling programs shift to areas with less existing infrastructure. Some notable project wins during the quarter include pump rebuilds for a number of feedstock, process, and transfer applications for a refinery in the Rockies, and we provided a mix of high alloy, isolation, and control valves for a Trona mine project in southwest Wyoming. In the Powder River Basin, activity is beginning to recover as we supplied a number of three-phase separators equipped with valves and instrumentation for a large independent operator. as well as a saltwater disposal package for another EMP operator. Our instrument compressed air and dryer packages continue to experience high demand as operators replace gas pneumatic systems with compressed air systems to eliminate greenhouse gas emissions. In the Permian, we supplied a number of pipe racks, pump skids, and separators from our Tomball, Texas fabrication facility for a large operator and received a number of orders for new heater-treater vessels and separators. We have been successful in expanding our hydraulic jet pump rentals, replacing ESP applications as operators gravitate to our solution, yielding improved performance on more flexible rental options. In Canada, we saw notable wins in the quarter, with PVF orders for turnaround activity from a large Canadian oil sands producer, well-headed injection packages in southeast Saskatchewan from an Alberta-based producer, along with artificial lift products for maintenance CAPEX work in central Canada. We delivered several large actuated valve orders through an EPC for a private Alberta-based midstream operator. Our international segment experienced the most impact to revenue associated from delays in supply chain and labor availability impacts. Activity is increasing on smaller projects which are beginning to gain traction as more rig reactivations occur in the Middle East. Furthermore, a number of the EPCs we routinely conduct business with are seeing an increase in project activity and bookings. Some notable wins in the corridor include delivering a large number of gate, globe, and check valves, power cables and accessories for a combined heat and power plant in the UK, power cables and accessories for an upstream producer in Kazakhstan, and electrical bulks for an operator in West Africa. Also of note, we have provided pipe fittings and flanges for a project to an NOC in Oman, as well as a range of gate, globe, ball, and check valves for a gas processing facility in Kurdistan. Out of our UAE operations, we provided actuated valves to an EPC for a methylene reclamation unit for an Indian-based refinery and a triethylene glycol production project in Pakistan. We also provided valves for a produced water project in Iraq for an IOC and to an EPC for the Jurassic production facility in Kuwait. Our industry has been dealing with product inflation and impacts on product availability caused by shortages and delays in the supply chain. Our supply chain team has been focused on minimizing disruption by ensuring we have ample products available to support our customers. We leverage our global spend with suppliers to ensure we have preferred access to volume available while balancing the risk and cost elements through a combination of domestic and import sources. Not only have we worked hard to obtain allocations, we have provided suitable alternatives to customers who increasingly depend on D-NOW to find solutions that meet the requirements. This has resulted in several of our customers expanding their approved manufacturers list using D-NOW's AML. We do have a bit of pipe inventory in transit and pending timing of ultimate receipt, we may experience some challenges with pipe availability in the first half of 2022. Inflation continues for seamless pipe as both domestic and import prices were up during the quarter. Moving to our Digital Now initiatives, our digital revenue as a percent of total SAP revenue for the quarter was 42%. 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. We are leveraging eSpec, our digital product configurator for complex engineered equipment packages to advance our U.S. process solutions business. Over the past few quarters, in support of operators' need to reduce greenhouse gas emissions, this tool has helped many of our customers configure and spec air compressor, and dryer equipment packages for replacement of gas pneumatic systems. Furthermore, a number of our customers' project teams use eSPEC to help build and construct project bids, while others are using it to size launcher and receiver packages for quoting. And finally, we have launched AccessNow, a suite of automated inventory management and inventory control solutions for our customers. Our AccessNow products include cameras, sensors, smart locks, barcoding, RFID, and automatic data collection solutions that enable our customers to better manage and control inventory without incurring the expense of a staffed inventory location. And now I'd like to touch on a few comments related to energy transition. In the U.S. Gulf Coast, we provided duplex stainless vein pump packages to a biodiesel refiner who converts animal fat to biodiesel. and fire water pumps for an electric truck vehicle manufacturer plant in Texas. In Canada, we won multiple orders for zero-emission actuated valves through an EPC working on a carbon capture and storage project in Alberta and from a producer drilling exploratory wells to extract helium for use in the high-tech industry and market. These successes highlight how a number of existing products we provide can extend to growth markets like carbon capture and high-tech industrial manufacturing. We continue to monitor and track an increasing number of energy transition projects. Our business development team has been working a variety of RFIs and RFPs for many customers pertaining to renewable diesel and gasoline, sustainable jet fuel, direct air capture, carbon capture and storage, hydrogen and CO2 transmission, and storage projects. As we review bill of materials from the list of energy transition projects, we work with our manufacturer partners to secure access to broader ranges of suitable products that will service these expanding end markets. With that, let me hand it over to Mark.