DNOW Inc.

Good morning. My name is Sam and I will be your conference operator today. At this time, I'd like to welcome everyone to the distribution now third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Well, good morning. Thank you, Sam. Good morning, everyone, and welcome to NOW, Inc.' 's third quarter 2022 earnings conference call. We appreciate you joining us, and thank you for your interest in NOW, Inc. With me today is David Cherchensky, 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 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. 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 attributable to NOW, Inc. excluding other costs, and diluted earnings per share attributable to NOW, Inc. excluding other costs. Each excludes the impact of certain other costs and therefore have not been 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 third 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 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. Good morning, everyone, and thank you for joining us. The third quarter of 2022 represents the culmination of three years of planning and preparation, patience, and performance by the people of DENOW, the people who inspire one another to win the market with a disciplined focus on delighting the customer. The D-NOW of today is not about being everything to everyone. That's costly, unfocused, and you diminish and dilute everything you do. We're about finding where the solutions and the strengths we cultivate intersect with where the customer finds value. I'm amazed by the achievements we produced in the third quarter and for what we'll deliver for the full year 2022, but I'm not surprised. as we today have a strong focus on discipline and by holding each other accountable to produce results otherwise unobtainable. Thank you to the women and men of D-NOW for your intelligence and experience, your loyalty, innovations, and attitude around having fun, winning, and positively impacting our customers and communities. This quarter, we delivered strong performance across our key metrics. including free cash flow generation, revenue growth, EBITDA margin expansion, and capital return to shareholders. I am pleased with this continued execution as we further expanded gross margins and EBITDA margins to new levels. Revenues in the third quarter of 2022 improved 7% sequentially, beating our guide, and we're 31% higher when compared to the same quarter in the prior year. Our gross margins were 24.1%, a 40 basis point sequential improvement, supported by lower inventory charges, healthy project product margins, aided by continued inflationary tailwinds, coupled with our high grading strategy that focuses on applying our resources where the customers see value. Warehousing selling and administrative expense, or WSA, increased as expected in the quarter, ensuring our customers engage with the best professionals in the business, and while expanding headcount to maintain our excellence in customer service, which remains a key differentiator in the market. EBITDA in the third quarter rose to $53 million, up $6 million sequentially, outperforming our guide as we delivered better-than-expected revenue growth on higher gross margins while maintaining WSA as a percent of revenues. EBITDA margins were 9.2% of revenue for the third quarter, up more than 500 basis points from one year ago. Through three quarters of this year, we generated EBITDA of $128 million, or 8.1% of revenue, $100 million more than the same period for 2021. This quarter, we also produced $44 million of positive free cash flow. Our highest level at this rate of sequential quarterly revenue growth as we grew revenue, improved gross margins, invested in inventory, are standing up a new super center in the Bakken, and added employees to fuel the future. This performance is counter to the prior trends of consuming cash during growth cycles to fund working capital builds and is a great achievement for our team. and it gives me greater confidence in our ability to generate positive free cash flow for the full year, which would be quite an accomplishment given the historical counter-cyclical forces. Moving to our segments, in the U.S., revenue was $435 million, up 7% sequentially. Product margins were resilient as non-pipe product lines offset some margin compression on steel line pipe, which we expected to happen and mentioned on the last few calls. And inventory charges were lower in the period, improving the overall gross margin results. During the quarter, we extended an MSA agreement with one of our top customers for an additional five years, a strong vote of confidence in the value DENOW is delivering to their operations. And our onsite integrated supply model is experiencing sequential growth, as our team provides embedded sourcing, procurement, and material management services connected with the sale of products for our customers. We saw sequential revenue growth as operators took advantage of high commodity prices to invest in production. In midstream, we continued to provide pipe fittings and flanges and actuated valve products across the gathering, processing, and natural gas transmission end markets. On the LNG side, we were successful in supplying line pipe for two interconnect projects to feed natural gas to an LNG processing facility. We are increasing the utility of our super centers as we place more resources in areas that drive higher returns through a more efficient model. And during the fourth quarter, we will open our newest PBF Plus super center in Williston, North Dakota, right in the heart of the Bakken play. This facility investment expands D-NOW's commitment to servicing our customers across the Williston Basin. through the centralization of PVF plus inventory by providing our customers with technical sales and product application support through the capabilities of our project management and field maintenance support teams. It will be equipped with the new downhole pump sales and service department and our composite line pipe alternatives to steel pipe through our TSM fiberglass brand. It will include our power service stocking and service offering as well. From our FlexFlow business we will locally rent and maintain a fleet of our trailer mounted horizontal surface pump packages from this location. This new Williston Supercenter is a mega center as it will house businesses from both our U.S. energy and U.S. processes businesses. It provides revenue synergies not only to leverage the scale of the facility but to reap the added benefits tied to information sharing and collaboration, leading to a revenue capture from cross-selling products and services across the company. U.S. Process Solutions delivered its highest revenue quarter since 2019. Customer demand for fabricated pressure vessels, measurement packages, pipe racks, manifolds, water transfer, and saltwater disposal units remained high as we shipped modular units into oil and gas producing regions and gathering in midstream interconnect locations. Demand increased for pump packages to support crude pipeline transfer, water transfer, and chemical injection applications. Customer inquiries for longer lead time packages increased as operators worked to scope midstream project timelines, taking into account the timing and supply chain constraints related to the availability of semiconductor components in manufactured equipment such as BFD, PLCs, and transmitters. We are seeing an increase in activity and inquiries for pump products on the produced water and water management side as water transfer and permitted water injection site spare capacity diminishes. We are expanding our aftermarket service to meet increasing demand for field service on fluid handling equipment. This includes upfront commissioning, field and service repair, and aftermarket part sales at our locations. We have aligned our effort by teaming up with our preferred manufacturers on training while leveraging our eTRAC digital tool to build and expand the knowledge base on installed customer equipment. We have seen demand for our horizontal rental pumps improve, mostly tied to the saltwater disposal, water transfer, and frac protection activities. and we're seeing increased adoption of our jet pump solution for new producing wells where it is used for sand and debris removal before the well goes on rod pump artificial lift. In Canada, revenue was $86 million for the quarter, an increase of 19% sequentially and 26% year over year as drilling and customer activity improved. Growth was led by a number of projects in the oil sands, midstream valve and actuation work, and artificial lift projects in the upstream. We don't expect this higher level of projects in the fourth quarter, however. We saw growth from a joint contractor who uses our digital e-commerce platform to acquire and procure drilling products and consumables to support their day-to-day drilling operations. With a major EMP operator, we provided valve and actuation solutions for an LNG feeder line project acquired through an EPC. With this same customer, we are in the early stages of setting up a materials management onsite program that would position D-NOW for future revenues to support their day-to-day MRO maintenance operations. Market demand for many of our products remains high, and in response, our supply chain team has been able to source import products and expedite shipping containers that have helped source specific projects for our customers. For international, revenue was 56 million, sequentially lower by 3 million. The decline in the quarter was driven by the negative impact of foreign currency due to a stronger U.S. dollar. We have focused on improving financial performance by high-grading customer offerings to increase operating margins while adjusting our country footprint as we optimize our operating model. We are experiencing an increase in quoting activity and an increase in the number of projects that are being funded suggesting a more positive outlook on future growth. In the UK, we are seeing operators and EPCs move forward with more traditional oil and gas projects, including major upgrades to existing North Sea fields and onshore facilities. In Europe, revenues are up as the oil and gas market rebounds and some of our joint contractors increase activity. We are seeing EPC activity pick up with several projects to support increased development. In the Middle East, we are beginning to see increased project activity from a couple of fields that have been in a multi-year hiatus and are now starting to be reactivated and developed. With the uptick in rig activations, we are seeing more inquiries for equipment and consumables before the rigs sail out to their final destinations to begin their contracts in the Middle East. We are also seeing an increase in project bidding for modular production facilities in UAE and Oman. In Southeast Asia, we are seeing more projects with the building out of oil and gas pipe transmission and with IOCs and EPCs who are working on several new projects, including FPSOs. In Latin America, activity has increased as NOCs overhaul drilling rigs, which drive sales in drilling spares and consumables. We remain upbeat about our international segment, where we see the environment improving and market conditions becoming more favorable. On the energy sustainability front, we are working with many customers to provide solutions on their greenhouse gas reduction initiatives, which includes flare retrofit and instrument air upgrade projects. Our customers have active programs to identify sources of methane leaks and to seek to reduce or eliminate them in order to achieve their publicly stated Scope 1 emission reduction targets. As these greenhouse gas emission sources are identified, we find it drives demand for our PVF products. In the renewable natural gas or RNG market, we provided spooled line pipe for a large RNG project in the U.S. that connects over 8,000 dairy farms equipped with anaerobic digesters to a pipeline. Once fully operational, the full environmental impact of this RNG project is estimated to reduce 33,000 tons per year of greenhouse gas. We're excited to support more of these types of projects. In the CCUS space, we provided PVF on a CO2 pipeline project that collects and transfers CO2, which is used for tertiary enhanced oil recovery operations in the northern U.S. And in the hydrogen market, we provided multistage pumps used in the transfer of purified water in the production of green hydrogen. As evident from these examples, our PVF and PUMP products extend themselves nicely to the emission capture CCUS, RNG, and hydrogen markets. And it is one of our goals to be a leading distributor for our existing customers or new customers that are learning how D-NOW can meet their product, service, and ESG commitments. Moving to our Digital Now initiatives, digital revenue improved to 42% of our SAP revenue, up sequentially. During the quarter, we received additional commitments from customers to acquire our AccessNow unattended security monitoring inventory management and inventory control solution. Our eSpec process and production equipment configurator helps support the process solutions revenue growth by making it easier for customers to work with our technical sales team to explore, configure, and budget a wide range of products in our fabrication product line. eTrack Our asset lifecycle and management tool, which provides customers the ability to track, schedule maintenance, and order replacement parts for field equipment, has seen a 49% growth in the number of companies tracking assets from the previous quarter. And finally, we are using statistical modeling tools to aid in the demand planning and scheduling of projects to enhance our stocking strategies to ensure availability of material for both planned projects and unplanned customer maintenance activities while reducing stock outs and buyouts for Dena. Now in terms of capital allocation, we will continue to maintain a strong balance sheet and a flexible approach moving forward with a bias towards strategic and margin accretive acquisitions while opportunistically executing on our $80 million approved stock buyback program announced in August. Our operational performance has been solid this year. enabling us to fuel growth, generate cash in a quarter as we grew revenue, thus providing more flexibility and liquidity for capital allocation. We continue to forage and build a pipeline of inorganic opportunities that supports our strategy and satisfies our financial thresholds for acquisitions. And we have some good prospects that we hope to get over the finish line soon. With that, let me hand it over to Mark.