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.

Thank you, Dave, and good morning, everyone. I want to start by highlighting the format on some of our financial statements have expanded this quarter as we account for the activity under our inaugural share repurchase program we announced in August, and as we account for the non-controlling interest of a joint venture in our international segment, which we consolidate into our financials as we are the primary beneficiary and controlling member, recognizing $1 million in non-controlling interest in the quarter. Total third quarter 2022 revenue was $577 million, a 7% increase or $38 million in growth over the second quarter of 2022, despite a $4 million foreign currency headwind. On a year-over-year basis, we saw a strong third quarter 2022 performance, spearheaded by revenue growth of $138 million or 31%. EBITDA profitability expanded to 9.2% or $53 million for the quarter. over three times what it was one year ago on solid operational execution and increased gross margins. The U.S. revenue for the third quarter 2022 was $435 million, up 7% or $27 million sequentially, and up $123 million or 39% year-over-year on continued strengthening rig count, persistent depletion of duck inventory, and increased completion activity. Our U.S. energy centers contributed approximately 77% of total U.S. revenues in the third quarter, with our U.S. process solutions contributing the other 23%. Turning to Canada for the third quarter, revenue was $86 million, up $14 million, or 19% from the second quarter of 2022, with an increase in project activity and several customers moving up deliveries to the third quarter that were originally planned for the fourth. Compared to the third quarter of 2021, Canada's revenue increased $18 million, or 26% year-over-year. International revenue in the third quarter of 2022 was $56 million, down $3 million from the second quarter, primarily driven by a $2 million foreign currency headwind from the stronger U.S. dollar relative to foreign currencies. Year over year, third quarter 2022 international revenue declined 5%, or $3 million. However, that includes a $6 million foreign currency headwind. As Dave highlighted earlier, our third quarter gross margins increased from the second quarter by 40 basis points to 24.1%. Warehousing, selling, and administrative, or WSA, for the quarter was $95 million. Up $6 million sequentially and flat with the second quarter WSA expense to revenue percentage and in line with our guide for the third quarter. Looking back one year ago to the third quarter of 2021, we expanded quarterly revenue by $138 million, yet only added $9 million in quarterly WSA costs, or about 7% of the revenue increase as we've worked to improve efficiencies. The majority of the WSA sequential increase is in line with achieving significantly improved financial performance in the higher associated variable compensation expenses, including an additional $1 million in non-cash performance share-based compensation, paired with increased healthcare costs in the quarter. Moving to the operating profit of our geographic segments, in the third quarter, the U.S. contributed $31 million in operating profit, or 7% of revenue. Canada delivered $10 million in operating profit, or 11.6% of revenue in the third quarter. And the international segment reported $3 million in operating profit, or 5% of revenue in the third quarter. Moving below operating profit, third quarter other income and expense included interest income of approximately $1 million, partially offset by unfavorable foreign exchange transaction losses. And on a gap basis, the effective tax rates for the three and nine months ended September 30, 2020 were 6.8% and 7.6% respectively. As I discussed on our last call, this is the effective tax rate as calculated from the face of the income statement and is below the typically expected tax rate at these earnings levels. As our tax provision includes a favorable tax benefit impact from changes in the tax valuation allowance on our deferred tax assets. This is why when imputing our non-GAAP tax rate, we exclude such tax benefit. In the non-GAAP, effective tax rate is closer to approximately 28% year-to-date. And 28% is a pretty good proxy for the effective tax rate for the go-forward quarter and year when excluding other costs. Third quarter 2022 net income was $41 million and included $1 million in net income attributable to non-controlling interest. Net income attributable to Now, Inc. for the third quarter was $40 million, or $0.35 per share. And on a non-GAAP basis, net income attributable to Now, Inc., excluding other costs, was $34 million, or $0.30 per share. Now moving to EBITDA, excluding other costs, or EBITDA. For the third quarter, EBITDA was $53 million, or 9.2% of revenue. The EBITDA to revenue flow-throughs of 16% sequentially and 26% year-over-year were are a result of our team's execution and strategic focus across a new D-NOW structure that streamlines our operations and makes better use of technology to process customer orders, resulting in improved service levels to our customers. Now moving to the balance sheet, we ended the third quarter in a net cash position of $267 million, including zero debt and zero draws in the quarter. increasing our total liquidity to $635 million, which includes the $267 million of cash on hand, plus $368 million in additional credit facility availability. Accounts receivable was $406 million, an increase of 4%, or $17 million from the second quarter. Inventory was $361 million, an increase of $30 million, while maintaining a high quarterly inventory turn rate of 4.9 times comparable to last quarter. Accounts payable was $339 million, an increase of $49 million from the second quarter. And we posted positive free cash flow of $44 million in the quarter. Capital expenditures in the third quarter were $1 million as we invested in infrastructure to enhance efficiencies and improve service levels to our customers. And as of September 30, 2022, Working capital excluding cash as a percentage of third quarter annualized revenue was approximately 14.3%. Now moving to capital allocation. During our last earnings call in August, we announced the authorization of the company's common stock repurchase program for up to $80 million, continuing through December 31, 2024. During the first partial quarter of the program, we were pleased to take advantage of market opportunities as we made initial progress in our repurchase program, already repurchasing $4 million or approximately 5% of our authorized repurchase program at an average share price of $10.33. As of September 30, 2022, we have $76 million available under the repurchase program, and we maintain a continued priority for acquisitions and organic growth while also having the ability to repurchase shares opportunistically as we use the tools in our broadened capital allocation framework to generate attractive shareholder returns without deviating from our disciplined approach to balance sheet management. And with that, let me turn the call back to Dave.

Thank you, Mark. And now turning to our outlook. For the fourth quarter, we expect customer spending to slow down primarily due to holidays in November and December. and secondarily to customer budget exhaustion. As such, 4Q22 revenues are forecast to decline sequentially in the mid-to-high single-digit percentage range, especially given the robustness of the third quarter purchasing in preparation for year-end and amid the seasonal impacts described above. We are expecting 2022 to become our highest revenue growth percentage increase year, approximating 30%. with our strongest EBITDA percent year ever. With full year 2020 EBITDA forecast to increase nearly $120 million when compared to the full year 2021 EBITDA due to revenue growth, stronger gross margins, and a more efficient fulfillment model. And we expect full year 2022 to generate positive free cash flow, even with much higher revenues than expected. I'm excited about 2023. where we see continued capital discipline from our customers, resulting in a measured improvement in rig count in the US and Canada. I'm also optimistic about our international business, where I see a more rational approach to energy security that will lead to more investment in domestic oil and gas sources, combined with renewables and imported LNG. So we expect our international segment to grow next year under more favorable market conditions. The success of the past three years can be attributed to the ethos of D-NOW, an inspired organization that is dedicated to delighting the customer and winning the market. We pride ourselves on being the critical connector for our customers, delivering essential products, innovation, and differentiated solutions, a culture where employees not only show up for our customers each and every day, but for each other and our communities. I'd like to thank the several hundred Distribution Now employees listening this morning. Everything you do to delight our customers and everything you do to distinguish D-NOW from the competition is represented in the news we're presenting to our shareholders today. You, by engaging your customer in providing solutions to their operational challenges, focusing on value and values, not transactions, produce these impressive results. With that, let's open the call for questions.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause here for just a moment to compile the Q&A roster. Our first question today comes from the line of Nathan Jones with Stifel. Nathan, your line is now open.

Good morning, everyone. Good morning, Nathan. I'm going to ask the question. I don't know whether you'll answer it or not. Do you have any kind of framework outlook for 2023 that you're thinking about that you can share with us what your customers are telling about their investment plans for 2023 or, you know, just any more color you can, you can give us on how you're thinking that'll go.

Well, you know, Of course, we've begun kind of a scenario planning for 2023. We haven't begun to construct a budget, and we're not guiding yet. But what we're seeing in terms of current levels of rig counts, completions, the kind of anecdotal feedback from customers is that the markets, in our view right now, is going to expand 7% to 10%. At least that's kind of our placeholder range as we plan for inventory levels, talent acquisition, et cetera. So, you know, the rate of growth next year won't be like it was in 2022, but we expect the market to get better. But, you know, at a lower level of increase compared to 2022. That's helpful.

Dave, I think for the last, I don't know how many quarters in a row now, you've been telling us that gross margins are probably going to go down sequentially the next quarter and every quarter they keep going up. Maybe you can just talk a little bit more about the inputs to that that are keeping gross margins up at these levels. You should be starting to see some compression from line pricing, I would assume. So there must be some other offsets in there. Just talk about the dynamics that are keeping margins at those levels and what you think is kind of the sustainable gross margin level.

Okay, that's a fair question, Nate. So let me start here. We've grown our business 30% this year, or we're forecasting that for the full year. We have about 35 fewer employees today than we did a year ago. Part of that's because it's hard to find folks in a stress market like this. But part of that's because we're focused on growing the business and applying our limited resources where the value is most perceived by our customers. And while pipe prices have plateaued and the cost of replacement pipes pipe in our inventory is growing, and we do expect contraction for steel pipe and saw it in the third quarter, all the efforts that we take to high-grade our business, the recent acquisitions we did which had higher gross margins, for example, the businesses we sold over the last few years, all of that works to really hone in on activities that the customer is sees more valuable than the alternatives. And the alternatives are some of the competition who favor transactions and pursue revenues, sometimes to the detriment of the balance sheet and sometimes to the detriment of the bottom line. But I think high grading has been our best friend there. Yes, I've been wrong in terms of forecasting some topping off of gross margins. I'm happy to have been wrong about that. But as the numbers solidify, especially in the pipe area, I think I'll be more accurate in terms of some subtle contraction in gross margins. But I tell you, our folks working very closely with customers on a relationship basis, not a transaction basis, are people focused on improving the product mix. So there's market pricing. and there's margins per product line, and then there's focusing on the right products and changing your mix to maximize gross margins, that's become an art that we're really getting good at as a company. So that's been somewhat of a hedge over the expected pipe contraction, which I think is happening now and will continue over the coming quarters.

Maybe just to comment on how far through that process you are, because I'm sure there's still a wide variety and a wide mix of margins of products that you sell. And there's probably some products that you sell that customers don't see that much value in or won't pay for the value that you're providing. So is there that kind of 80-20 approach to the portfolio that you can continue to apply that may continue to expand growth margins?

I do think there are opportunities. I think it's, you know, we're really good at managing pipe valves, fittings, pumps, some of our core products. And we, because we tend to be in the upstream space for sure, you know, the largest distributor in that end market, we get preferred costing and we tend to favor our core suppliers. And we try to improve the mix in our favor along those lines. I think in terms of is there room for improvement, I think so. But I think it's going to be concealed a little bit by the pipe convergence we talked about. And by that I mean steel pipe prices to customers have stabilized, might even have peaked in a few areas, and then the cost of replacement inventory grows. But I think managing mix will be very helpful, and I think there's upside there, but there's the reality of, you know, we went through the last four or five quarters of limited product availability, stress in the supply chain, DENOW's favored position with manufacturers where we were able to take advantage of the supply chain constraints for a competition, that's going to stabilize a little bit, and we'll see some normal reversion to more regular margins. But then it's about managing mix, and it's about focusing on those higher margin product lines that I really talk about all the time, and it was inherent in your question. But I think there's upside. I do think there's some headwinds, though, in the pipe area. That all makes sense. Thanks very much for taking my questions. Thanks, Nate.

Thank you, Mr. Jones. The next question today comes from the line of Jeff Robertson with Water Tower Research. Mr. Robertson, your line is now open. Thank you. Good morning.

Dave, can you share any color on 23 with respect to the types of costing and the types of, quote, inquiries you're getting in terms of the margin mix next year?

Well, so far, I mean, you know, I would say probably 75% of our business, or a high percentage of our business, is kind of shame month activity. Now, we have a part of our U.S. business called Process Solutions, which was 23% of our U.S. revenues in the quarter. There's more planning involved in the fabrication part of that business. Most of the bidding and most of the activity is within a quarter kind of business, so In terms of what the mix of activity would be for 2023, there's a limited view there, so I really can't get too much color there. But we're kind of targeting margins, at least in the fourth quarter, gross margins consistent with what we delivered in the year-to-date part of the year. And again, like I alluded to earlier, we're going to see some contractions in a few areas. But the projects we're bidding on now that happen to be in 2023 are at similar margins to what we delivered in the first nine months of the year.

You mentioned in your comments about the e-commerce solutions that D-NOW offers, including, it sounds like, increased customer adoption on some of those platforms. Is that adoption help support some stickiness in some of the gross margins that you're seeing?

Yeah, Jeff, this is Brad. I'll take that one. Yeah, our e-commerce platform has evolved over many years, and we provide round-trip punch-out for large customers where they punch out from their ERP system into our system and and essentially fulfill a requisition, and then we have a B2B integration with them. So a lot of that is all digital transacted. So a lot of the business is under contractual pricing that would be similar to what they would get at the branch level. but the cost to process the orders would be lower. So you could think of the business to be in line with the gross margin, but it could be accretive to flow-throughs to EBITDA. We also have B2B customers that work within a catalog and a similar approach where they have a number of users that log in and are buying and transacting and procuring every day within the system. And then those orders are routed to the respective branch or super center, in this case, that fulfills the order in order to meet the customer required delivery date.

So basically you all can, it lowers your costs, so it enhances your margins on the products that you otherwise sell through those channels, right?

Yeah, we like to think of it as one of the high-efficient models we have of the several models that we engage our customers in. It's one of the highest models that can really attribute higher flow-throughs to EBITDA.

Okay. Thank you very much for taking my questions.

You're welcome.

Thank you, Mr. Robertson. Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Our next question is from Sean Mitchell with Daniel Energy Partners. Sean, your line is now open.

Great. Thanks for taking my questions, guys. One, just as you think about the earnings call season so far, several oilfield service companies, what I would say are your peers, have talked very positive about international opportunities in the future. In particular, some folks have mentioned we're in the early innings of kind of this international expansion, if you will, in terms of activity and growth. When you think about your international business, where do you see that? I'm not asking for what does 23 look like or what does next quarter look like, but just as you think about this over the next three to five years, if international is in the early innings and what does that business makeup look like to you or the opportunities that look like to you internationally, in terms of percentage of your overall business number one and then number two do you do you think that's achievable in terms of organic growth or do you do you think that's something you guys would have to look at M&A opportunities well let me I'll take a crack at this and then I'll probably hand it to Brad but in terms of international growth where we're going to see

probably the most growth for the year 2023 is in the international arena. It's been kind of lagging behind the really powerful growth we've seen in the U.S. and Canada over the last several quarters. So we do expect international to be brighter in terms of the rate of growth we'll experience next year. In terms of where we'll see it, we're going to see it first with some of the larger projects we're We won recently in Kazakhstan, in the North Sea, and in the Middle East. We'll start to see that show up more so in projects. We'll see as drilling contractors add rigs and outfit rigs, we'll see the increase of drilling spares and pumping spares and things like that. We'll see that start to grow. That'll be the main areas. And then it's going to be a matter of some of the, you know, we talked about some of the businesses that were under hiatus for several years that are now starting to restart. And Mark talked about that a little bit for Middle East VIE. That's going to be helpful to further growth as well. But I don't know, Brad, you had any color to add to that?

Yeah, Sean, I'll add a couple comments to Dave's comments. When we spun off from NOV in 2014, our international business was highly geared to the offshore market. Over the last six to eight years, we've been diversifying that business as that offshore market has struggled to recover. We're much more diversified. You know, we service, you know, the land market, also the offshore market, but projects, a lot of day-to-day business. We acquired McLean Electrical out of the UK, so we have electrical distribution business. You know, we export out of Houston, out of the UK to, you know, West Africa. You know, we are still, you know, do quite a bit of business in the upstream there, but we're a lot more diversified. And, you know, we're seeing, and I think, you know, to your point, a lot of the investment now going into offshore, potentially more deep water rig utilizations increasing, day rates are increasing. So we see that as a positive, potential positive, you know, mechanism for further growth in our international as really the general recovery of international comes back, you know, out of COVID. And so all those kind of taken together, we're You know, we have an upward bias towards our international growth as a segment.

That's helpful.

Thanks, guys.

Thank you, John.

Thank you. There are no further questions at this time. Mr. David Cheruchinsky, CEO and President, I'll turn the call back over to you.

Okay, well, thank you for your interest in D-NOW, and we look forward to talking with everyone on our next call in February. Have a good quarter.

That concludes today's conference call. You may now disconnect.