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.