DNOW Inc.

Good evening. My name is Bhavesh and I'll be your conference operator today. At this time, I would like to welcome everyone to the now incorporated first quarter 2023 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 would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, Please press the star followed by the one again. Thank you. Mr. Brad Weiss, Vice President of Digital Strategy and Investor Relations. You may begin your conference.

Thank you, Babish, and good morning, and welcome to NOW, Inc.' 's first quarter 2023 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 of 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 the call, including responses to your questions, may contain forecasts, projections and estimates, including but not limited to comments during 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 May 4, 2023, 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 our latest Forms 10-K and 10-Q that Nowink 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 in 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 of 2023. A replay of today's call will be available on the site for the next 30 days. We plan to file our 2023 Form 10-Q for the first quarter 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 proud to see the results of our talented team produced again this quarter. As we kick off the year outperforming the sequential revenue guide provided on our last earnings call, despite weather-related activity declines, reduced U.S. rig counts and completions, and lower oil and gas prices. The discipline we've maintained as we execute our strategy continues to be constructive to earnings, most recently propelled by our international segment that delivered strong growth in the first quarter with its best quarterly revenue growth percentage sequentially and year-over-year in more than a decade. We had good growth across all three segments, marking the best first quarter EBITDA results since spinning off in May of 2014. Our achievements across the globe are a result of the smart planning, communication, focus, and discipline by our employees. It's a testament to the hard work and dedication of our team, and I'm grateful for their efforts to deliver success. Regarding capital allocation, we continue to make strategic inorganic investments to fuel growth through acquisitions while opportunistically repurchasing shares. By balancing these two approaches, or even better, pursuing both, we aim to drive sustainable long-term value for our shareholders. In an effort to further bolster our U.S. process solutions business, earlier this week we acquired two U.S. businesses for $33 million, which expand manufacturer- territorial exclusivities for key products and provide enhanced revenue opportunities with our existing D-NOW customers in those areas. These new territories are adjacent to D-NOW's other existing agreements, widening our geographic reach and deepening our products and solution offerings into the downstream refining and industrial markets. I'm excited to welcome the employees joining the D-NOW family and look forward to the growth we can cultivate together. We also continue to return value to shareholders through our $80 million share repurchase program. During the quarter, we were active in the market as we purchased 3.3 million shares amounting to $36 million. Through the end of the first quarter, we have consumed 53% of the authorized $80 million repurchase program. Now I'll hit some of the financial highlights. First quarter revenue was $584 million. sequentially higher by 7% on better than expected international growth of 28%. Canada was up 11%, and the U.S. grew 3%, primarily attributable to the December acquisitions. On a year-over-year basis, revenue is up $111 million, or 23%, outpacing the 15% year-over-year increase in global rig count. 1Q23 gross margins were 23.5%, lower sequentially, as expected, primarily due to dilutive project margins. For example, project margins in 4Q22 were better than in 1Q23, given the product mix, and reduced vendor consideration was lower in the first quarter following a strong 4Q22 close. For the first quarter, EBITDA was $47 million, or 8% of revenue, solid performance yielding excellent results. On a year-over-year basis, EBITDA is up 19 million, or 68%, resulting from a robust 17% year-over-year EBITDA to revenue flow-throughs. Free cash flow consumption was $11 million in the first quarter as we invested in working capital to support growth and deployed $5 million in capital investments to round out infrastructure and rental asset enhancements. That said, we expect to produce positive free cash flow in 2023. Now some regional comments. In the U.S., revenue was $427 million, an increase of $13 million or 3% sequentially, driven by growth from newly acquired businesses and demand for our U.S. process solutions offerings for process, production, and pump packaged equipment. U.S. energy revenues were relatively flat sequentially as U.S. rig count softened by 2% and was negatively impacted by poor weather in the Northwest. Many job sites were inaccessible due to record snowfalls in the winter. Rig counts in dry gas areas receded in the first quarter as operators sought to balance supply with demand for natural gas as Henry Hub spot gas prices hovered around $2.65 per million BTUs. Across the oily basins, drilling and completion activity drove demand for our seamless and ERW steel pipe, as well as our spool-mounted coil line pipe. Our Williston Mega Center is now fully operational, and we're excited about the growth opportunities and revenue synergies the new center enables. Key successes in the quarter include agreement renewals for IOCs and gas utility and refinery customers to provide PVF and MRO products for their maintenance capex spend. During the quarter, we grew market share as we implemented a new PVF commitment with an IOC in the Permian. and we expect the increase in market share to contribute to future revenue growth. Activity improves sequentially with our integrated supply chain services customers as we work to lower their lease operating expenses by managing the demand for products and improving availability of inventory to meet construction and project timeframes. In the downstream market, spending by refining and chemical processing customers remain strong as they ordered projects product for projects for turnarounds. We are providing PBF products for biodiesel conversion projects at refineries as customers increase their throughput of renewable diesel products. Our U.S. process solutions business grew to 26% of our U.S. segment due to revenue additions from the December acquired companies, while demand increased for our lacked units and pump booster packages as the midstream activity was up for us in the quarter. Our vessel fabrication business also remains strong as operators seek to increase their separation capacity for newly completed wells. We are seeing growth in pump packages, air compressors, and aftermarket service capabilities in non-oil and gas markets where we are targeting industrial manufacturing and food and beverage producers. We are providing vertical turbine pumps for mining projects and industrial air compressor dryer package to a cereal manufacturer in the food and beverage market. Last quarter we announced our acquisition of Stealth Pump and Supply. Looking collectively at the service organizations of Odessa Pumps and Stealth in the Permian, the combined service offering positions D-NOW as one of the largest pump service organizations in the oil and gas plays. This strength has led to successfully securing a win for a preventative maintenance contract with a large IOC to service over 800 installed pump package units. Outside of oil and gas, we want an additional service contract for a preventative maintenance program for pumps in municipal water districts, further unlocking revenue opportunities in the water wastewater markets. Our FlexVolo business saw increases in demand for water transfer applications as operators sought to expand their use of water recycling as opposed to water disposal to offsite permitted disposal sites. During the quarter, we deployed several of our mobile horizontal pumping units to Canada to support pipeline pressure testing for a new LNG pipeline under construction. We saw demand increase for products that mitigate emissions as onshore production operators find solutions to mute their overall environmental footprint. Increased regulation and industry standards around flaring and emissions drive greater demand for many of the natural gas emission reduction products D-NOW provides to our customers. Furthermore, we see demand improving for our recently acquired Ecovapor oxygen removal systems applied to oil and gas tank batteries. During the quarter, our Ecovapor business expanded their Zero-Two lease fleet as contracted units grew, despite a challenged sub-$3 per million B2U's gas environment. The growth during the period speaks to the value proposition of the 02's ability to reduce customers' routine gas flaring at tank battery installations by removing oxygen from the collected gas venting from the oil and produced water storage tanks. While Ecovapor has traditionally supplied oxygen removal equipment to oil and gas operators, we are seeing an increase in demand for our products in the renewable gas industry. renewable natural gas industry. Similar to oil and gas, RNG operators must address oxygen contamination within the collected waste gas from landfills and bio-waste gas sources in order to sell the gas to the midstream market. This challenge is solved using our EcoVapor 02 units. It opens up the growing market as we see RNG demand increasing. We achieved a notable success in winning a large project for Ecovapor 02 units with water separation equipment to swine farm operators who collect and process the biogas to sell to the midstream gas market. And since March 31, we were successful in securing the largest Ecovapor RNG order from a large landfill gas customer. The ordered units will ensure the project meets the customer's stringent pipeline specifications for their RNG streams. In Canada, revenue was $83 million for the quarter and increased 11% sequentially. Our Canadian team continues to perform well as we supply and service a diverse mix of oil and gas operators, midstream companies, projects through a number of EPC customers, and land-based drilling contractors. Highlights include strong demand for our valve and actuation solutions for a number of capital projects, as well as daily MRO demand. Outside of oil and gas, we saw revenue improve from an agribusiness customer with demand for pipe fittings and flanges for a processing plant project. For international, revenue was $74 million, a sequential increase of $16 million, or 28%. For the past few quarters, quote volume has increased in our international segment as long cycle projects were being budgeted. We are now seeing D-NOW win those competitive inquiries, converting those to orders and driving higher revenue in the first quarter. In the UK, MRO activity increased with electrical distribution products, industrial and safety equipment, and valve products to our McLean business. We are seeing growing activity tied to increased customer investment in the North Sea as reinvestment in existing fields and new investment in green fields and FPSOs expand. Revenue expanded with the major IOC as we provided a variety of products to them in the UK, Middle East, West Africa, and Asia Pacific. During the quarter, we renewed a five-year framework agreement for electrical products with the customer based out of the Middle East and an additional agreement for PPE products with a major IOC with downstream refining and petrochemical assets. In Norway, activity increased as customers seek to expand their natural gas exports to Europe to replace a portion of the previously imported Russian gas. On several projects, we supplied low-voltage electrical cables and instrumentation to an EPC to support a subsea tieback project for an offshore production platform. In Australia, inquiries are improving for both MRO and greenfield activity as we secured a sizable project for electrical cable in the carbon capture space and secured orders for pumps for an FPSO development with a major IOC. Moving to our Digital Now initiatives, our digital revenue as a percent of total SAP revenue for the quarter was 43%, lower sequentially due to customer and project billing mix on the top line growth. During the quarter in Canada, we began receiving purchase orders digitally with a new round-trip punch-out customer, enabling procurement simplicity and driving efficiencies for both parties. This preferred order method delivers incremental revenue efficiently alleviating costs linked to non-digital ordering. Within our U.S. Process Solutions organization, we began rolling out our new field service app that allows our pump mechanics to document and perform service work through an all-digital interface. We will continue to expand the training and use of this technology to help drive efficiencies and improve customer service. Last quarter, we talked about our FlexFlow OptiWatch solution. as a digital real-time asset monitoring tool used to measure the performance and health of a horizontal pump working asset. We are happy to see that our OptiWatch software solution is gaining popularity with customers as we actively monitor over 100 customer-owned horizontal pump units in the field. This provides additional revenue opportunities for field service, maintenance, and asset replacement. With that, let me hand it over to Mark.