DNOW Inc.

Welcome to the Now, Inc. Fourth Quarter 2022 Earnings Conference Call. My name is Adam, and I'll be the 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. I will now turn the call over to Vice President of Digital Strategy and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Well, thank you, Adam, and good morning, and welcome to Now, Inc.' 's Fourth Quarter and Full Year 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 February 16, 2023, 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 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 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 fourth quarter and full year 2022. A replay of today's call will be available on our site for the next 30 days. We plan to file our 2022 Form 10-K 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. Two years ago this week, Mark, Brad, and I were shivering in this office on our earnings call running on limited backup power during the Great Texas Freeze winter storm URIE. That storm brought the coldest temperatures in over seven decades to Texas in a cold snap that impacted millions of people from Texas to the Canadian border. We had no power and more chilling had no earnings in the year just ended 2020. The roads were impassable, the path to the future uncertain. Misery pervaded the whole economy. But there were some things at that time I was certain about. about how a new D-NOW could transform itself and thrive. One, we knew that the single most important factor in successfully implementing a strategy path, be fully committed, be disciplined, and to purposefully reject the temptation by those marginal distractions which would dilute our strengths. Simply put, build on and get better at what we're good at, equip our people, allocate talent and time where our customers see value, and let the other guys deal in distractions. Two, we messaged exhaustively about deliberately high-grading our business. By that, we mean focusing on higher-margin manufacturers, businesses, product lines, locations, and activities to deliver strong gross margins irrespective of inevitable commodity price gravity. Be selective, manage mid- and maximize margins. We pick partners as suppliers, expect partnership reciprocity, commit purchase volumes to them, honor our commitments, promote their brands, and deliberately promote value. Three, our primary operational objective was to increase customer intimacy, improve product availability, manage projects, and deploy ample inventory stocks regionally. ultimately redesigning our PBF distribution business by deploying a more efficient fulfillment model, moving from a highly autonomous branch model to a more cohesive regional super center posture. This transformation was a predicate to improving product availability and value for our customers, providing better support to our suppliers, enabling higher levels of productivity while better managing downside risk. Our operations strategy places a premium on order accuracy, adherence to customer specifications, and on-time delivery, and our customers are rewarding us for doing so. And lastly, number four, we said we'd win the market through 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 a lure. Our sales teams place a premium on returning value to our customers by truly understanding their challenges in articulating D-NOW's proprietary solutions. The competitive spirit of our sales professionals has helped create a true culture of winning within D-NOW, and the technical acumen and supply chain expertise they provide to customers has proven to be of vital importance in an era of supply chain disruption and capital disciplines. Although every one of our employees brought about this D-NOW renaissance, I want to directly thank and cheer our top sales leadership for enduring the corporate pivot, for promoting changes internally into the market, for leading with confidence and attitude, and delivering a much more profitable enterprise, which without them would otherwise be impossible. Now I'll hit some of the financial highlights. Fourth quarter revenue was $547 million, lower sequentially by 5% at the better end of our guide provided on the last call. For the full year 2022, revenues were $2.136 billion. In 4Q22, overall gross margin was unchanged at 24.1%. Our full year 2022 gross margin was 23.7%, up 180 basis points from the full year 2021 levels where 2021 was itself a record gross margin year in its own right. For the fourth quarter EBITDA was 47 million or 8.6% of revenue, strong performance, especially in a period with seasonal and holiday headwinds. For the full year 2022 EBITDA was 175 million or 8.2% of revenue, a consequential turning point for the company. setting the stage for significantly improved earnings power and cash flows into the future. During the second half of 2022, we generated $48 million in pre-cash flow, and on a full year basis, in a year where we increased revenue over $500 million, added over $130 million in inventory for our customers, and $9 million in infrastructure and rental equipment, we had zero consumption of cash from operations, and only consumed $9 million in free cash flow in 2022. Additionally, to fortify our U.S. process solutions business, we completed two acquisitions in December of 2022, building on DENOW's pump and engineered process equipment capabilities. These acquisitions strengthen DENOW's value to customers and open up additional opportunities in energy evolution. One of the patented solutions we acquired provides customers with dual value proposition of improved gas recovery, as well as emissions reductions within traditional oil and gas, and the elimination of flaring. It also expands our reach into the renewable natural gas or RNG market. Our second December acquisition grows our market-leading pump position in the Permian area by expanding our customer relationships, customer base, and our capabilities on aftermarket service and pump repair. Now some comments on a regional basis. In the U.S., revenue was $414 million, $21 million lower sequentially, down 5% due to predicted seasonal impacts. Product margins declined slightly as non-pipe product lines partially offset some margin compression on steel line pipe, which we expected to happen and mentioned on the last few calls. Gross margins were flat as vendor consideration in the fourth quarter grew due to achieving higher purchase volumes. During the quarter, we began operations for our newest super center or mega center, as I mentioned on the previous call, located in Wilson, North Dakota, strategically positioned right in the heart of the Bakken play. This new facility afforded us the opportunity to optimize our regional footprint by consolidating several of our standalone businesses. Not only does our Williston Mega Center house our U.S. energy pipe valves and fittings regional operations, but it also includes other D-NOW product lines such as TSNM Fiberglass and FlexFlow. We experienced a number of market share wins in the fourth quarter as customers realized the benefits in our ability to lower their operating costs by partnering with D-NOW in customized supply chain solutions. We also delivered several large pipe orders during the fourth quarter for a utilities company in the southeast and an operator in the Gulf of Mexico, totaling more than $12 million, which drove our strong 4Q revenue beat. And those $12 million in orders are not expected to recur in the first quarter of 2023. In the midstream sector, we continue to supply steel and fiberglass pipe, actuated valves, and fittings for our natural gas transmission customers. Notable projects include new compressor stations, compressor upgrades to existing stations, and pipeline expansion products across the U.S. In the downstream sector, customer spending during the quarter remains strong as several of our refining and chemical customers hold in PBF and consumable deliveries before year-end to prepare for 1Q23 turnarounds. In our U.S. process solutions business, we saw demand for our fabricated equipment packages increase as orders continue to be placed heading into 2023. We experienced demand for vessels for tank battery construction, as well as lacked units, meter skids, launcher receivers, and water transfer units as midstream activity picked up in response to the steady increase in drilling and completion activity over the past few quarters. Outside of oil and gas, we provided air compressor packages and vertical turbine pump for mine operations for rare earth minerals extraction. For our pump distribution businesses, we experienced steady demand for pump packages for oil and gas tank battery construction, SWD construction, and midstream projects. We look to continue to diversify our end markets and drive incremental revenue gains from projects that are upgrading or expanding municipal water districts. In our FlexFlo product line, demand for our trailer-mounted horizontal rental pumps is picking up steam as drilling and completion activity and SWD permitting drives demand to transfer and dispose of increased quantities of produced water. We are currently making investments by upgrading some of our mobile fleet in response to increased market demand as extended delivery times for permanent SWD units persist. In Canada, revenue was $75 million for the quarter, a 13% decrease sequentially, primarily due to seasonal impacts as expected, and revenue was up 4% year-over-year. Overall, we delivered impressive results, yielding a full-year Canadian operating profit of 9.5%, a record for our Canadian segment. During the quarter, we invested in our Canadian operations as we begin initial work in upgrading to a new supercenter location in Alberta, with the work scheduled to be completed in the first half of 2023. It will house multiple business units under the same roofline, maximizing the synergies and value we can deliver for our customers, while fostering more collaboration and promote a higher level of teamwork. The workspace will be more modern and will reduce our environmental impact as we adopt the use of a solar integration system and other lighting energy efficiencies. Furthermore, the new facility will help offset rising facility and tax operating expenses when compared to our older facilities. For international, revenue is $58 million, increasing sequentially by $2 million. Market conditions are steadily improving in most of the areas we serve as numerous countries seek to balance their investments in energy security, affordability, and sustainability. In the UK, we have seen a return to growth as market activity is increasing both offshore and onshore, where we see higher order inquiries for cable, valves, safety, and bulk electrical products from our McLean distribution brand. Activity for West Africa increased as we supply major IOCs with gas detection sensors, power cable, and electrical bulks to our export model based in the UK. In Norway, we are seeing activity increase as joint contractor and service company OEMs ramp up development of subsea and related surface projects. In the Middle East, we are seeing opportunities pick up as rig activations increase, drilling and well servicing ramps up, and EPC projects materialize from NOCs across the GCC countries. During the fourth quarter, we supplied a variety of pipe to an NOC in the Middle East, and towards the end of the fourth quarter, invested in future revenue as we increase our local pipe inventory investments by over $5 million. We also experienced an increase in orders for drilling products to support rig count growth and activations in the regions. We remain upbeat about our international segment, where we see activity increasing and market conditions becoming more favorable. And now I'd like to make a few comments related to energy security and the energy evolution. In the fourth quarter, With an IOC operator in the Permian, we worked directly with their greenhouse gas capture project team to provide PBF, instrument air packages, and flare retrofit products that reduced their greenhouse gas emissions, and we expect more projects like this to continue into 2023. We provided PBF products in support of a turnaround for a renewable diesel project and an oil refinery. In the midstream space, we supplied PBF to an operator for a transmission line used to transmit CO2 for enhanced oil recovery. And finally, we provide products for an expansion project in the Gulf Coast for a carbon capture facility. Moving on to our digital initiatives, our digital revenue as a percent of total SAP revenue for the quarter increased to 46% as we continue to leverage technology, automate processes, and work with customers to integrate our systems and leverage digital technologies to streamline the procure-to-pay process. A big focus of ours has been on integrating punch-out catalogs for customers who want to leverage our digital catalogs to transact electronically by populating requisitions and purchase orders digitally, providing a fast and efficient means to order processing. We continue to provide meaningful data to our supply chain program customers, which helps them better understand and analyze how their day-to-day processes impact their supply chain, and thus provides a framework for collaboration by optimizing and improving workflow processes. We are leveraging our AccessNow technology to provide 24-7 secured access and inventory control to products that are on-site location at a major refinery in the Gulf Coast. And finally, I'm excited about OptiWatch, a digital monitoring service offering from our FlexFlow business targeting customers who own and operate permanent horizontal pumping units operating on a permitted saltwater disposal site. Our service monitors the health and operating performance of horizontal pumps by using the data collected to predict future maintenance events that could lead to unplanned maintenance, significantly improving the runtime or reducing the downtime on operating units. Furthermore, our service identifies inefficiencies that may cause excessive power draw. Using our performance-based algorithms, we can adjust the pump operating performance, resulting in improved operating efficiencies, yielding a net benefit in lowering the customer's operating expenses. As an added benefit, it also helps to lower customers' CO2 equivalent consumption values, thus potentially improving their respective ESG scores. With that, let me hand it over to Mark.