DNOW Inc.

Hello and welcome to the Now, Inc. Second Quarter 2022 Earnings Conference Call. My name is Nadia 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 followed by 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, Nadia. And good morning, everyone, and welcome to Now, Inc.' 's second quarter 2022 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 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 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 or 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. calculated in accordance with GAAP. 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 second quarter. A replay of today's call will be available on the site for the next 30 days. We plan to file our second quarter, 2022 Form 10-Q 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'm thrilled to be here today celebrating a record-breaking quarter, the sixth consecutive quarter of significantly improved financial performance and prospects for the company. What an exciting time it is for distribution now. Revenues in 2Q22 were 14% stronger than the first quarter, well above what we guided, and 35% higher when compared to the same quarter in the prior year. Our gross margins climbed to a high-water mark of 23.7%, aided by healthy project product margins resulting from inflationary headwinds, lower inventory costing, and pricing benefits, which outpaced our previous full-year margin guidance in the 22% to 22.5% range. Warehousing Selling and Administrative Expense, or WSA, was driven down to its lowest level as a percent of revenues since the third quarter of 2014, a time and another era when there were 1,900 U.S. rigs, more than two and a half times the 2Q22 level. EBITDA in the second quarter was $47 million, with 2Q22 EBITDA alone exceeding the results produced in all of 2021. representing, again, the highest levels of EBITDA since 3Q14, a bygone era given today's significantly improved rig efficiencies and capital discipline by our customers. EBITDA in terms of percentage of revenues was 8.7%, an all-time record achievement. Working capital excluding cash remains strong, turning more than six and a half times annually, enabled by continued healthy inventory turns despite planned inventory growth, which we're pre-positioning to ensure that products are available for our customers and to strengthen our indefatigable push to maximize gross margins. And late in the second quarter, we closed on a small but potent U.S. process solutions acquisition and expansion on our 2021 FlexFlow purchase, fortifying our leading position in horizontal trailer-mounted rental pumps. These improvements are, without a doubt, a result of the loyal and talented 2,300 members of the D-NOW family who have transformed this company by focusing on what matters most to our customers. We continue to refine our model to drive efficiencies through regionalized fulfillment while maintaining proximity to our customers like no one else in our space. Our drive is to make this incredible turnaround indelible, which is the main objective for this team right now. This is a testament to our unrelenting mindset focused on understanding our value in the market, evolving our product and service mix to be selective about the business we target and the activities we sidestep. While we celebrate our results, we acknowledge that we can still enhance our model by capturing additional efficiencies and investing in our people and technology in the coming quarters to continue this transformation. Today, our customers understand the value we offer in terms of having access to top-tier quality products, technical sales expertise, critical product availability, and a customer-first service model geared to align around a common goal. Our team outperformed. Revenues came in better than we guided to in the first half of the year and are expected to be even better for the full year. In the second quarter, revenues were stronger as we saw customers pull in and accept delivery for future needs early due to worries about supply chain issues. Our revenues benefited from that in 2Q. Large projects and process solutions, including one for $9 million, delivered earlier than expected. and the expected 2Q seasonal revenue breakup in Canada was the narrowest decline we experienced in the last nine years. This 2Q revenue overperformance means a lighter sequential revenue bridge going into the third quarter, yet we still expect a better than average 2Q to 3Q build compared to prior years and a much stronger 3Q than our guidance implied last quarter. And now some color on our segments. In the U.S., revenue was $408 million, up 22% sequentially on 13% U.S. rig count growth. U.S. growth was bolstered by expanding E&P customer activity. We are capturing the rewards of the efficiencies that we've talked about over the last couple of years and have selectively targeted the opportunities with customers to execute orders and projects from our new regionalized fulfillment model and centralized project execution teams. Forward positioning our inventory to our new PVF Plus supercenters has enabled D-NOW to become the preferred choice in product availability in a hyper-competitive market. And combined with our innovative, solutions-oriented employees with a customer-first mindset, it affords D-NOW the opportunity to capture margin accretive share. We continue to supply packaged units and MRO products to help reduce our customers' Scope 1 emissions. working with our dedicated emissions reduction teams. We are seeing increased activity and demand for our fiberglass solutions as customers recognize the value of our turnkey solutions and expertise. We experienced growth as we supplied PBF and safety services for several operators during an extended turnaround season. In the biofuels area, we provided PBF to refineries to support their renewable diesel expansions and turnaround projects. During the last three to four calls, we've talked about positioning and investing in growth. In addition to the investments in inventory, we just completed a full quarter of business for a new express location in the Permian, where we have made excellent progress in terms of servicing and existing and new customers while maintaining customer proximity and delivering value to the last mile. Most day-to-day activity there is managed locally. while project and large unplanned orders are being fulfilled from the nearby super center. For U.S. process solutions, where customers previously carried excess inventory, customers were ordering equipment in advance, taking into account a shortness of inventory and long lead times. We benefited from the unusually high pre-planning and buying activity in the second quarter. Furthermore, some customers are dealing with a lack of workforce availability and field experience for installations, and that difficulty benefited our turnkey and engineering solutions. We are pleased to see how a now recovering saltwater disposal market, where we shipped SWD units for operators to dispose of produced water from drilling activity. We continue to seek ways to reduce our customer scope on emissions. Our customers are replacing gas pneumatic systems with compressed air systems, which has led to high demand for our instrument air packages. and those orders are continuing. And we continue to collaborate with customers to leverage additional ESG benefits. We recently developed and shipped a number of solar and battery powered chemical glycol units which prevent ice formations at the wellhead during freezing temperatures. These units would have historically been gas powered and emit greenhouse gases to the atmosphere. This is now one of the ways the industry is seeking to improve and lower greenhouse gas emissions. On the fluid handling and pump packaging side, we are seeing demand improve for our crude pipeline packages as oil production grows and midstream customers are looking to de-bottleneck existing oil pipelines. In Canada, our team continues to buck expectations in terms of market share and profitability, which was quite strong in the seasonal downturn period. Revenue was $72 million for the second quarter, a 12% sequential reduction, and up 41% year over year, as second quarter revenue fared much better than the midpoint of our expected seasonal decline. During the quarter, we strengthened our market position, winning multiple orders for valve and actuation projects. Our relationships with numerous EPCs and fabricators have contributed to growth as we successfully won several notable projects with key customers. and we continue to expand our e-commerce sales, hitting a new quarterly high with a top 10 e-commerce customer as we offer their users a simple-to-use, customizable platform for ordering and approving MRO material. Market demand for products remains high, and our supply chain team is working to manage lead times and to source and preposition inventory at strategic locations to meet our customers' demand for projects and MRO day-to-day activity within a supply-challenged environment. Our international segment revenue improved sequentially and year-over-year. Excluding the impact from foreign currency headwinds, as Mark will talk about later, international second quarter revenue increased 19% year-over-year. We are starting to see improvement in international market conditions and activities increasing as we see our customers move forward with offshore investments. As subsea tieback projects begin to take hold, and FPSO projects materialize in Europe. Utilization of offshore drilling rigs are improving and day rates are increasing, expanding our opportunities to provide MRO and OEM rig equipment as current inventories are consumed through contracted offshore work. In the Middle East, we are seeing drilling and production investments expand. We also note increasing activity in Southeast Asian shipyards from jack-up rig activations that require new equipment and consumable materials materials for loadouts. In Indonesia, activity is improving as brownfield activities in the downstream sector materialize as customers plan for 2023 shutdowns. In Latin America, we are seeing an increase in demand as NOCs begin to unfreeze budgets and reactivate plant turnaround planning and maintenance programs related to offshore activity from drilling contractors. As discussed on our last call, we had ceased operations in Russia and are out of the country. We also reduced our country footprint in the international segment by exiting a country in Latin America and the Middle East where our regionalized service model will help service some of those customers from an export model going forward. Historical revenue from these closures represented about $4 to $5 million in quarterly revenue. Moving to our Digital Now initiatives, Digital revenue comprised 40% of our SAP revenue, down slightly as a percent from the first quarter as our digital revenue grew 9% sequentially, slightly below the overall company growth. We continue to see success with our customer-centric digital dashboards, which have driven higher percentages of bill and material accuracy as compared to prior periods. The accessibility, transparency, and data have expanded the knowledge sharing with customer and is leading to improvements in overall efficiency and customer satisfaction. We successfully secured a multi-year integration services contract for a national oil company leveraging our mercury asset management solution. The software will manage data on the customer's installed valve population and provide data on repairs, maintenance, and help streamline the ordering of parts or replacement units. And on the development side of our eTRAC product, we enhance the maintenance workflow within the software by sending automated maintenance reminders to subscribers. We expect this new feature to make it easier for our customers to plan the scheduling of maintenance work on assets with our D-NOW service department and technicians. Now I'd like to spend a few minutes on capital allocation. As I mentioned earlier, during the second quarter we closed on a U.S. process solutions acquisition, an expansion to our FlexFlow horizontal rental pump solution from 2021. This acquisition fortifies our pump strategy and supplements our permanent installation base with additional rental H-pump solutions at a time when purchased equipment lead times are stretched and the criticality of equipment uptime is in high demand. In addition, our FlexFo solution offers customers flexibility in disposing of the water collected as a byproduct of oil and gas production, with customers choosing between renting these units to fit their budget as an operational expenditure or procuring permanent SWD units through capital expenditures. And we offer both of these options. This acquisition meets our discipline criteria. of further differentiating D-NOW in non-commoditized customer solutions at better gross margins and EBITDA flow-through dynamics. Regarding our M&A pipeline, we continue to work a number of prospects to further drive inorganic growth. Pivoting from M&A, I want to highlight the separate announcement earlier today on our expanded capital allocation strategy describing our inaugural 80 million share repurchase program. This authorization reflects the Board's confidence in D-NOW's post-transformation, significantly improved financial performance, superior balance sheet, and our desire to allocate capital to our owners. Our substantial liquidity position and newly transformed earnings profile position D-NOW with this ability to expand the options at our disposal for capital deployment among a continued priority for acquisitions and organic growth opportunities. This authorization expands our commitment to generating attractive shareholder returns without deviating from our disciplined approach to balance sheet management. With that, let me hand it over to Mark.