DNOW Inc.

Hello and welcome to the now incorporated first quarter 2022 earnings conference call. My name is Emily and I'll 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, Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Thank you, Emily, and good morning. and welcome to Now, Inc.' 's first quarter 2022 earnings conference call. We appreciate you joining us and thank you for your interest in Now, Inc. With me today is David Cherchinsky, 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 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. 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 the 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. Please refer to the reconciliation of 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 first quarter. A replay of today's call will be available on the site for the next 30 days. We plan to file our first quarter 2022 Form 10-Q today and will also be available on our website. Now, let me turn the call over to Dave.

Thanks, Brad, and good morning, everyone. What a great way to kick off 2022 with the results our team delivered in the first quarter. Today marks just over a third of the way through the year, and I'm encouraged by the momentum building inside D-NOW. We are pursuing and capturing desirable market share and significantly improving the earnings power of the company. Over the past two years, we have focused on transforming our business with a relentless focus on serving as the connector or critical link of global manufacturers to our customers in providing the products and services they require in a moment of scarcity and pronounced supply chain uncertainties. Two years ago, at the depths of the downturn, our organization made bold commitments to deliver durable, significantly better financial performance and placing our customers at the center of everything we do. We were selective and became intentional around the suppliers we support in order to improve product availability for our customers and to reduce inventory risk while enhancing gross margins through the cycle. We focused on protecting valuable market share, driving growth, and aggressively pursuing financial fitness. And you can see how this transformation has reshaped D-NOW and ultimately our financial results. We are reminded, especially in this pivotal geopolitical moment, that the world needs energy. Economies require it to grow, and it is a critical source for national security. We said we'd win the market by continuing to increase sales and market share from the careful cultivation of a world-class sales team. We would provide unmatched customer attention with a bias towards solutions and value without relying on price as the lure. We said we'd simplify our business through regionalized project fulfillment, supplier selection, inventory procurement and management, and product and project pricing. We transitioned to a model that maximizes physical proximity to customers while gaining operational efficiencies. Those commitments have been kept and the results are showing up in the numbers. For example, EBITDA excluding other costs for the first quarter of 2022 was $28 million or 5.9% of revenue. We grew inventory by $46 million since year end to $296 million as we ready for summer project activity and growth in the second and third quarters. About half of the added inventory comes from our strength in sourcing high-demand pipe, and the remainder of the growth is destined for specific customer demands for future periods. Like we said on our last call, and even though revenues were better than we guided to in the first quarter and now expect to be even better for the full year, our expectations to be cash flow positive in 2022 stand. We believe we'll consume cash in the first half of the year and generate cash in the second half and full year 2022. We are focused on building for the future. In the first quarter of 2022, we achieved the single best EBITDA to revenue results yet, while turning our working capital, excluding cash, more than seven times a year. In the Bakken, we are imminently standing up our third new major super center in less than a year. Customers are seeking better visibility in the supply chain and more accountability in the commitments their partners make around availability of material critical to project completion and maintenance schedules. They are asking for more transparency around the quality of process and integrity in global manufacturer's operations. They are asking for deeper commitments as integrated supply partners with better tools to understand their installed and surplus assets. These customers are finding value in our solutions to ensure projects are completed on time, within the budgeted timeframe, and that maintenance schedules critical to production revenues are met. These are the areas where our processes and culture are more aligned with where our customers see value. And now for some color on the results. We generated $473 million in revenue in the first quarter, up $41 million, or 9.5% sequentially. Our gross margins remained near record levels at 22.6%, well above our record 2021 gross margins of 21.9%, and better than expected. In the United States, revenue was $334 million, up 10% sequentially. U.S. growth was captured through expanded sales of pipe, valves, and fittings essential for producers to grow oil and gas production or offset declining production used for new well tie-ins, reflux of existing wells, gathering lines, and tank battery construction used to separate and measure crude oil, gas, condensate, and produced water. Some of the successes we had during the quarter include a contract renewal of one of our top 10 customers for a five-year commitment that helps them achieve their production targets and optimize their supply chain. And with one of our top 10 customers, we captured growth due to a combination of increased drilling activity and the completion of a large central production facility in South Texas. We experienced growth across a number of our mid- to large-cap customers in the Permian, Eagleford, Powder River, and Williston basins and recognized a general increase in plant activity and maintenance work performed during the quarter across a number of producers. And with a large independent producer, we continue to expand our relationship and develop smart workflow tools which communicate status and the tracking of orders through a data exchange platform. Where our customers experience growth, we have responded by deploying various strategic investments, and they are bearing fruit. For example, within our Permian operations, we have been expanding our sales and commercial teams. high grading our product lines and customer accounts, optimizing our regional footprint, where, for example, last quarter we opened up our new PVF Plus Supercenter and regionalized a project team. This has led to tremendous momentum and excitement, not only in the Permian, but also in other areas across the U.S. and Canada, as the fundamentals of our end markets are strong. We have been operational at our Casper, Wyoming, PVF Plus Supercenter recently, for almost a quarter and the results are equally promising. We are scaling our Houston PBF Plus Supercenter to support the Gulf Coast and just recently secured our new Williston, North Dakota PBF Plus Supercenter. And now a few comments on pipe. We continue to see strong demand across most pipe product lines. As a leading line pipe distributor for our upstream and midstream market, our pipe margins continue to be a bright spot due to the combination of increased demand and limited market availability. Our pipe inventory grew during the quarter to support increased customer demand, primarily driven by an increase in seamless line pipe. In the midstream space, we worked closely with the customer to reduce emissions and prevent flaring as we supplied PVF, in addition to automated and actuated valves, for a compressor station vent stack replacement project for a Utah-based midstream gas transmission company. On a gathering and processing side, we were awarded several thousand feet of line pipe in addition to the PBF for eight dehydration units for a project in North Dakota from a midstream operator. With another large integrated midstream operator, we were awarded multiple PBF projects for a launcher receiver package for a Permian Basin pipeline that exports natural gas to Mexico, a Bakken 12-inch pipeline an 18-well brine project, and three well connect assets in the mid-continent region. We were successful in onboarding a new midstream customer for a Permian gathering station and project. We are winning business and expanding PBF sales with several gas utility companies as we continue to target these customers in the Northeast and Midwest. In the downstream market, we saw revenue improve from the fourth quarter with increased sales of PVF and mill tool and safety products to capital projects and to a number of planned maintenance and scheduling refining plant turnarounds during the quarter. U.S. Process Solutions captured growing customer demand for our engineered pump packages, process, and production equipment. We are also seeing increased activity from customer inquiries as customers look to secure access to products. During the quarter, we provided a variety of fabricated equipment to producers across numerous plays. We shipped a large order of pipe racks and modular metering skids to the Delaware Basin for a major Permian operator, in addition to a number of separators to another large Permian operator from our Tomball, Texas fabrication facility. We shipped separator packages to a large independent producer with assets in the Powder River Basin. We continue to provide a wide assortment of process production and measurement packages, including LAC units, oil and water and booster skids, water transfer skids, and SWDs. In Canada, revenue grew to $82 million for the quarter, a 14% sequential improvement. We continue to perform well in Canada, led by a strong management team and our exceptional employees who put the customer at the center of our service model and then outperform their expectations. One of our top joint customer contracts joint contractor customers added rigs which help drive incremental revenue growth. This customer procures all of their drilling OEN equipment and MRO consumables for each operating rig using our B2B shop.dnow.com e-commerce platform, equipped with a customized workflow to match the customer's approval process while providing visibility that drives procurement efficiencies. We experience revenue growth from several major oil sands producers in addition to EPCs who are executing on projects. We shipped a large number of orders for sucker rods in artificial lift applications from several major producers during the quarter. And outside of oil and gas, we provided an assortment of PVF while expanding market share with a potash fertilizer mining company based in Saskatchewan. Our international segment revenue was flat sequentially at $57 million. In the UK and Europe, we continue to see the MRO and brownfield markets picking up with an increase of interest and activity within the drilling market as operators look for rigs for potential drilling campaigns. Of note, we extended an existing supply agreement for an IOC to supply electrical material for West Africa, where our electrical and MRO product exports for IOCs remain strong. The Russian invasion of Ukraine is causing many European nations to reevaluate the security and the reliability of their sources of energy that drive their economies, which translates into replacing imported oil and gas from Russia with more domestic or imported options, generating added demand for our products in those regions. As such, we have ceased operations in Russia where revenues and net assets each represented less than 1% of DENOW totals. In Kazakhstan, activity at the Tengiz field picked up with EPC contractors recruiting and mobilizing personnel, which led to additional activity. In Australia, we are seeing an increase in drilling and maintenance activity with both valve and pump service for both Brisbane and Roma areas. Our supply chain team has been focused on minimizing supply disruption by ensuring we have product available to support our customers' increasing demands. we have been successful leveraging our global and regional spend to ensure we have preferred access to the products and volume required. Not only have we worked hard to obtain manufacturer allocations, we have provided suitable alternatives to customers who increasingly depend on D-NOW to find solutions that meet their requirements. This has resulted in several of our customers expanding their approved manufacturers list, adopting D-NOW's AML. On the engineered packaged equipment side, we are experiencing delays from some of our OEM equipment and electrical component suppliers. Moving to our Digital Now initiatives, digital transacted revenue remained at 42% of total SAP revenue. Last quarter, I talked about our Access Now product line, which represents a suite of unattended inventory control and intelligent inventory management solutions. We are deploying our AccessNow port to an upstream producer in the Permian Basin. This remote warehouse solution is a technology-enabled, unattended inventory solution that increases visibility, reduces servicing time and costs, and ultimately enables a more efficient replenishment option for our customer. On the asset management front, we continue to expand our database of customer assets. Our eTRAC software is used to track and manage our customers' fabricated process and production assets. And our Mercury software is used to track and manage our customers' valves, enabling D-NOW to provide more efficient services and expedite the ability to provide replacement parts or replace the asset entirely if at the end of its useful life. Our eSPEC engineered equipment configurator and budget estimator continues to drive revenue through the sales cycle. And many customers are using this tool for our industrial compressed air skids that help reduce their greenhouse gas Scope 1 emissions. And now I'd like to briefly touch on our energy transition initiatives. As we have mentioned on previous calls, many of the products we sell today fit nicely into a number of energy transition projects. For example, during the quarter we were the technical valve supplier of choice to a major refinery in California that is reconfiguring their facility to process renewable diesel, renewable gasoline, and sustainable jet fuel from used cooking oils, fats, greases, and soybean oils. We are also successful in supplying a broad range of PVF for several additional biodiesel projects located at refineries across the U.S. as those operators move their refining and petroleum distribution business forward, meeting the new renewable fuel standards. On the carbon capture, sequestration, and storage side, we continue to assist customers with projects which are in various stages of planning, engineering, and design. We expect these opportunities to contribute to future revenue growth as the projects progress. We are also selling engineered instrument compressed air packages to a producer in the DJ Basin who is replacing their existing gas pneumatic systems in order to eliminate greenhouse gas emissions to the atmosphere. ESG and energy transition are new frontiers for today's energy producers, and D-NOW is being sought after as a trusted partner to provide that same transparency and integrity in greenfield projects and energy transition ventures. With that, let me hand it over to Mark. Thank you, Dave, and good morning, everyone.

Total first quarter 2022 revenue was $473 million, a 9.5% increase or $41 million in growth over the fourth quarter of 2021. On a year-over-year basis, we not only saw strong first quarter 2022 performance with revenue growth of $112 million, or 31%, we also emphatically improved our profitability with quarterly EBITDA improving $25 million to 5.9%. The U.S. revenue for the first quarter 2022 was $334 million, a 10% increase, or $31 million higher than the fourth quarter. Year over year, U.S. revenue increased $82 million, or 33% from the first quarter of 2021. The U.S. market continued to see increasing U.S. rig count, continued depletion of duck inventory, and a modest sequential increase in completions activity. Our U.S. energy centers contributed approximately 79% of total U.S. revenues in the first quarter, and our U.S. process solutions contributed the balance of 21%. Turning to Canada, for the first quarter, revenue was $82 million, up $10 million, or 14%, from the fourth quarter of 2021. And year over year, Canada, first quarter revenue increased $24 million, or 41%. International revenue in the first quarter of 2022 was $57 million, flat sequentially, and up 12%, or $6 million, compared to the same period of 2021. The stronger U.S. dollar relative to foreign currencies unfavorably impacted sales by approximately 2 million compared to the first quarter of 2021. First quarter gross margins were resilient in the period at 22.6%, above the 21.9% record gross margins benchmark set by the full year of 2021 and above our expectations. Warehousing, selling, and administrative expense for the quarter was 84 million, down 7 million sequentially, The strategic actions taken late in the fourth quarter of 2021 were fully visible on the WSA line as we successfully increased efficiency throughout our network while growing revenue. The primary driver, or about three-fourths of the WSA improvement, was a direct result of the facility and workforce optimization efforts completed late last year. While the balance, about $2 million, should be considered more temporary in nature as we experienced lower than expected healthcare costs in the first quarter, compounded with the benefit related to fewer payroll days sequentially. Taking those last two transient benefits into account, we do expect WSA to increase modestly by a few million dollars from the 1Q level of $84 million. Operating profit for the first quarter was $23 million, and we recognized favorable year-over-year and sequential operating margin flow-throughs across all three segments. The U.S. contributed $14 million in operating profit in the first quarter. Meanwhile, the international segment reported $2 million in operating profit, or approximately 4% of revenue, while Canada delivered $7 million in operating profit, or approximately 9% of revenue, a record level for our Canadian segment and a commendable job by them. Moving below operating profit, other income in the first quarter was $10 million compared to an expense of $1 million in the corresponding period of 2021. The change is primarily attributable to a benefit of approximately $13 million related to the decrease of contingent consideration liability, and such gain is excluded in our non-GAAP measures. GAAP net income for the first quarter was $30 million, or $0.27 per share. And on a non-GAAP basis, net income, excluding other costs, was $15 million, or $0.14 per share. Non-GAAP EBITDA, excluding other costs, or EBITDA, was $28 million, and a record-setting 5.9% of revenue, our highest since being public. To highlight the financial improvements being generated as a result of our recent transformation, we can compare our current EBITDA results of $28 million with the pre-pandemic third quarter of 2019 period that also delivered $28 million in EBITDA. That period just two years ago posted $52 million more in WSA costs than the first quarter of 2022. and 280 million more or 58% more in terms of quarterly revenue needed to achieve the same EBITDA dollars we achieved in the first quarter of 2022. A clear upgrade in our earnings driven by improved flow-throughs from our team's execution and strategic focus on where our customers see value with a D-NOW structure that makes it easier for our team to efficiently take care of our customers. This is clear proof the efforts and actions our organization has taken collectively have meaningfully shifted our company's composition and equipped our business for through-cycle profitability. I want to thank each of our loyal employees for these accomplishments that sets the stage for D-NOW's continued success. Now moving to the balance sheet, we ended the first quarter in a net cash position of $293 million, including zero debt and zero draws in the quarter. resulting in total liquidity of $582 million, comprising $293 million of cash on hand, plus $289 million in additional credit facility availability. Accounts receivable was $341 million, an increase of 12%, or $37 million from the fourth quarter, reflecting strong customer demand. In this period of global supply chain constraints, we continue to meticulously source and maintain access to the products our customers require, in large part because of our long-established and trusted partnerships with critical industry-leading suppliers. This capability provides maneuverability and reliability that differentiates D-NOW in the marketplace. And our commitment to support our customers can be seen on our balance sheet this quarter, as we were able to secure an additional $46 million in inventory and maintained a strong quarterly inventory turn rate of 4.9 times. Cash used in operating activities during the first quarter was $22 million as a result of our working capital build. In the first quarter, capital expenditures were nil. As of March 31, 2022, working capital excluding cash as a percentage of first quarter annualized revenue was 13.6%. And as Dave discussed earlier, we do expect working capital to increase and this ratio to expand some as we drive growth with reliable product availability to support our customers. We celebrate again a successful quarter, optimistic for the future, possessing the talent, resources, and strength to deliver sustained value for our customers and shareholders. And with that, I'll turn the call back to Dave.

Thank you, Mark. We have a strong balance sheet, zero debt. and an enviable liquidity position to support organic growth and strategic M&A opportunities. We're maintaining a disciplined approach as we continue to vet opportunities that support our overall growth strategy, generate accretive EBITDA margins, enhance our competitive position and differentiation. We are in various stages of conversations or negotiations And while we're hungry to do smart deals, expectations around valuations by sellers in this market require patience and finesse in making the right long-term investments for our shareholders. And now turning to our raised outlook. For the second quarter, we expect sequential revenues to increase in the low to mid single-digit percentage range, with EBITDA to revenue flow-throughs expected in the 10% to 15% range. salary and wages to attract new hires and retain our top talent, and increases in health care costs are expected to impact warehousing, selling, and administrative expense in 2Q. While drilling and completion activity in the U.S. continues to expand, we will see a simultaneous, seasonally slower second quarter breakup period in Canada. We usually see a D-NOW 2Q sequential revenue decline, but strength in the U.S. market should allow for overall growth despite both seasonal Canadian headwinds and winter storms in the north earlier in 2Q. We are raising total company guidance for the full year 2022 with revenue to now increase 20% with EBITDA to revenue incrementals approximating 20% compared to full year 2021. This is a meaningful upgrade to the forecast with strong bottom line earnings implications. As Mark demonstrated and the numbers reflect, we are really pleased with a significantly improved flow-through profile. We believe full-year 2022 gross margins could approximate 2021 gross margin percent levels or better. With our strong performance in the first quarter, we are raising our gross margin expectations for the full year to be in the 22.0 to 22.5% range. Overall, product mix, availability, project size and timing, and product and wage inflation, all impacting where we land within our guidance. And now I'd like to provide recognition on an accomplishment which makes us very proud, one that impacts all our employees, their families, and our customers. We have been working on improving workplace safety and making it a key aspect of how we work. I'm proud to announce that D-NOW globally has produced a lower than one total recordable incident rate, or TRIR, two years in a row, which have represented the lowest TRIR in DENOW's history. These results were made possible by the prioritization of our safety program at all levels of the organization due to a renewed focus and diligence by our employees. I'm proud of the work we have done in improving safety and the strides we are making in our safety culture we have invested in and will continue to build upon here at D-NOW. With that, let's open the call for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star and then 1 on your touchtone phones. Our first question today comes from Nathan Jones with Stiefel. Nathan, your line is open.

Good morning, everyone. Good morning, Nathan.

I wanted to start off with a question about cash flow. Typically, at this point in the cycle, the business would be a pretty heavy consumer of cash. And despite the improved growth outlook, you're still talking about being positive on cash flow this year. I know there are a multitude of things that contribute to that in the improvement in the operations of the business. Would love to get some detail on what the major things are that have improved and that have structurally changed in the business over you know, the last 10 years that will allow you to produce positive free cash flow despite the big growth numbers in 22.

Okay, so here are some of the changes that have taken place that improve our ability to produce cash even in a year where we'll probably see revenues expand beyond $300 million versus the prior year. So if you look at our working capital velocity over the last couple of years, you know, it's gotten – you know, to be in the 12, 13, where working capital excluding cash as a percent of revenue has been in the 12 to 15% range, that allows us to turn working capital seven or eight times a year. So there's so much more velocity or the cash conversion cycle is so much lower that enables us to invest less cash in the balance sheet even as we grow. Our earnings profile, you know, Mark talked about how In I think it was the third quarter of 2019, we produced EBITDA of $28 million, but we had hundreds of millions more in revenue and a lot more expense associated with delivering $28 million in EBITDA. So we're a leaner organization, or a leaner organization with ample inventory to seize growth, but a lot less inventory we had the last time we produced $28 million in EBITDA. We have more facilities closer to our customer. However, some of them are smaller today because we've kind of changed what each location does in terms of servicing the customer. So working capital velocity. The timing aspects as well, Nathan. So we said we'd probably consume half a cash in the first part of the year, first half. and we do expect to grow in the second and third quarters. The fourth quarter might be a little light, so we might get some relief on the accounts receivable side. But I think it's how we manage our balance sheet, where we distribute risk, so we won't have 2,000 items stocked in all the branches anymore. We'll tend to regionalize that risk and have an expert approach to managing that inventory. So I think those are the main things Plus, finally, while we engage thousands of suppliers to take care of our customers, for the main brands and the most important commodities to our customers, we have really focused on fewer suppliers where we would have better costing, better freight privileges, return policies, etc. even as things slow down, we can substitute other products and get idle inventory off the books. So all that coming together means improved P&L performance and the chance, and we feel pretty good about generating cash in 2022.

Thanks for that. I guess my follow-up on capital allocation, and you touched on it here, you obviously have a lot of firepower on the balance sheet. but historically during these up cycles has not been the best time to buy assets. Typically, it's been when the markets are generally lower. Maybe you can just talk about how you're thinking about that. Does it mean you're less likely to consummate some deals this year, next year, given the market size, sellers' expectations for prices are going to be high? Are you better off kind of just sitting on the cash for the time being and waiting for better opportunities?

There's no doubt in my mind that we will close acquisitions this year. Now, the ones on the table right now are smaller. And to your point, you know, we tend to be able to buy at lower prices in a downturn. But there are opportunities out there. We've got some we think we could close pretty soon. They tend to be small right now. But we have plenty of cash and a strong balance sheet, and we're very active looking for deals. We made two acquisitions last year, and I think we'll do that or better this year. But you know how that goes. It's never done until it's done, but we'll make acquisitions this year. Now, I often get the question about are there other ways to return cash to shareholders, and we do discuss other options as well as a possibility. And while we believe we'll produce cash, you know, this market can get even stronger, and, you know, so we do have a reserve amount of cash we want to hold on to to seize growth, to equip our locations. to take market share and to grow the business at high margins. So I think we've got a lot of flexibility, but we're actively pursuing acquisitions right now.

And just one more. I wanted to ask about, um, rig count versus duck count. Uh, we've seen the rig count go up, but we've also seen the duck count go down considerably. It's, you know, as low as it's been over the last, at least decade. Um, Does that portend for an even bigger increase in the rig count here? Are your customers telling you that they're looking at deploying more rigs into the market as these uncompleted wells are pretty rapidly disappearing?

Yeah. I mean, I think, you know, we like to see a lot of ducts there because it's kind of a backlog for us. As those ducts are completed, it provides immediate revenue opportunity. But as those ducts are depleted, I think, you know, the – future opportunity for increased spending by our customers is out there. Now, it's hard for us to gauge, you know, what that impact will be when it takes place, but we think reduction in ducts means our customers will spend more in the future should the economy continue to expand like this. Great. Thanks. I'll pass it on. Thank you, Nathan.

Our next question is from Tommy Mull with Stevens. Tommy, please go ahead.

Morning, and thanks for taking my questions. Hi, Tommy. Dave, I wanted to start on the Regionalized Fulfillment Strategy. You've given us several updates today and you have in recent quarters, but my real question is how far into that rollout are we? Are you pretty well there or is there more to come?

I think by the end of this year, we probably will have stood up five super centers. I think we're not done, but we've largely hit the hottest areas. It will be Houston, Casper, Wyoming, Odessa, Williston, and then a new super center in the Edmonton area in Canada. So those will hit the hotspots. Now some of our larger branches, and some of them are really large, tend to serve in that capacity as well. But I'd say we're more than halfway done with that process. Just for some color on the benefits from the super centers, they're not really warehouses. They're singular warehouses. customer-focused enterprises. They tend to be large in big areas where we really push the project business, which was usually handled by all the branches, to regional areas. The opportunity there is we can have project inventory in fewer places. We can push more volume in one location and reduced operating costs for each transaction. And because we have product available in abundance, we can command better margins. So I think we're more than halfway done. We're really seeing the benefits of that strategy. And I want to say that we also want to maintain proximity to customers. So we are not in a cost-cutting mode. We're in efficiency-gaining mode. We want to keep our branches open and close to our customers and kind of form that model differently as we go into the future.

Appreciate that, Dave. Shifting gears to your WS&A line, I think, Mark, I heard you say in the prepared remarks we should expect in dollar terms, maybe up a few million dollars into Q2. But if you could just clarify whether I heard that right. And then more broadly, just wanted to refresh on overall philosophy there on WSNA in an up cycle. So as revenue grows, how do you think about the rate of growth there for WSNA?

Sure. Yeah, and I did mention in the prepared remarks, you're right, that a couple million dollar build into 2Q. We ended last year kind of expecting 1Q to come in around 86 million, similar to how it was in 3Q21. And clearly, we were able to beat that. And one of those was related to some tailwinds, which are going to erode here likely into the second quarter. And then Dave talked about some of the inflation items hitting that number. But I think The amount of efficiency we've pulled out of the business, especially if we're talking about 2022 to 2021, in those flow-through numbers in the guide, it has a very low percentage increase in WSA in those models. And so I think we're positioning ourselves with the guide number to have kind of moderated WSA growth clearly into next quarter, and then that could continue into the second half some.

Yeah, I think one way to look at it, Tommy, is, you know, as we kind of do our internal modeling, we're calling for revenue to go up 20% year over year, and we might see WSA for the full year go up 1% to 2%. One thing that we're facing, like every other company, is we're seeking talent to grow the business, to upgrade our skills, to increase the staffing for our sales force and our technical sales people, et cetera. And that comes with the cost. So while we're seeing product scarcity and product inflation, we're seeing... scarcity of people to help grow our business. So that's going to have some headwinds. But just to put it in perspective, we might see revenues grow 20% and WSA full year grow 1% or 2%. So we're still very much on an efficiency track, but we're also very much wanting to make sure we have the people and the products close to customers to grow this business. That gives you kind of some additional context on our thinking along expenses in the business.

Yep. Thank you. And if I could toss one more in here, high level, just looking at the commodity environment, I think it's safe to say we're in a fairly robust part of the cycle here. Yes. That said, we're coming off a very low base from 2020-2021. So maybe commodities have run quicker than the opportunities have been realized for yourselves and others selling into the oil and gas end market. Long way of saying, is there not an embedded call option on pricing for your business at this point? I understand that you can't realize price one for one with commodities in real time, but... it does appear that there's some substantial upside potential, if not this quarter or next quarter, just over the reasonable planning horizon here.

Well, I think so. I mean, we went through each of the quarters last year with gross margins beating what we expected. But we did guide down gross margins, which were driven primarily by pricing, secondarily by... rebates which we kind of topped off in the fourth quarter we expected gross margins to come down and they did I do think there's more opportunities for price appreciation but it but it depends on on the rate of growth and our customer spending depends on supply and demand balance for product availability and you know and you know and competing you know factors but could there be greater price appreciation than what we've guided to possibly But we expected a decline in the first quarter and we saw it. But we are upgrading what we expect for full year gross margins.

Appreciate it.

Does that answer your question?

Okay.

It does. It does. Yep.

Ladies and gentlemen, we have reached the end of our time for the question and answer session. I will now turn the call over to David Cheruchinsky, CEO and President, for closing statements.

Thank you, Emily. Thank you for your interest in D-NOW, and we look forward to talking to everyone in the second quarter. Thank you.

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect.