DNOW Inc.

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Now, Inc. second 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'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.

Thank you, Chris. Good morning, and welcome to Now, Inc.' 's second 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, 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 your 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, August 2, 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 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 second 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 second 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. As we reflect at the halfway point of 2023, I am pleased with our solid execution, driving increased revenues, and delivering an expected strong earnings performance for the quarter. We generated significant second quarter free cash flow of $79 million, the best quarterly free cash flow for us in nearly four years. This cash haul accumulates to $116 million in free cash flow for the last 12 months, well above expectations considering the cash invested to produce the revenue growth during the last year. These achievements fueled further deployment of capital for acquisitions and share repurchases benefiting our shareholders. Second quarter results exceeded our expectations despite the smoky headwinds of devastating Canadian wildfires and lower U.S. land rig and completion activity in the period. As an example, we lost 81 U.S. rigs during the second quarter, more than anticipated, driving a full quarter sequential U.S. rig count decline of 5%, compounding the 24 rig or 2% U.S. rig count reduction experienced in the first quarter. While the pie, or market, got a little smaller, our piece of that pie, through the unwavering focus on our customers by our people, got a little bigger. We offer unique and innovative supply chain solutions tailored to the specific needs and demands of our largest customers and continue to invest in solutions that help them achieve their operational and financial goals. We are seeing those investments bear fruit as we captured growth across our integrated, technology-enabled relationships, demonstrating the enduring value those collaborations provide. We distinguish ourselves with a team of distribution experts, technical professionals, and licensed engineers who provide expertise related to pipe, valves, fittings, pumps, compressors, and fluid movement packages, fabricated liquid and gas measurement systems, and process and production equipment. The part of our business with the largest sequential growth was our U.S. process solutions business where we provide process equipment solutions to our customers through a range of rental assets, distribute OEM equipment including pumps, generator sets, air compressors, dryers, blowers, mixers, and valves, and provide aftermarket services that include rental, machining, and repair service from a team of field technicians. We've been able to defy gravity in this market because of the solutions we offer and the excitement and passion and winning attitude our people have, and it shows with the results produced. I want to thank our employees for enthusiastically taking care of our customers, being loyal to our key suppliers, supporting our communities and each other. Our focus over the last three years has been primarily on growth, higher gross margins, and significantly improving earnings, and our results reflect the success of those efforts. We are now leveraging those accomplishments and driving market share gains in a slower North America environment. capitalizing on our competitive strengths and establishing credentials in exciting new markets. There are many competitors in the market that provide similar products to ours, yet our customers trust D-NOW to ensure their operations and production goals can be achieved. Our team cherishes these partnerships and is motivated to exceed our customers' expectations. During the quarter, we onboarded a new customers who recognize the benefits of our alliance-based partnership competencies through the combined value of leveraging our technology, material management, and supply chain services solutions. Our program with this customer is in the early stages. As we expand additional locations, this partnership will provide the customer even greater benefits. And now for some financial highlights. Second quarter revenue was $594 million, sequentially higher by 2%. driven by the success of our U.S. segment, up 7%, with both U.S. energy and process solutions growing. Canadian revenue declined 20% sequentially, as guided, during the seasonal breakup, which was aggravated by wildfires that caused mandatory evacuations, disrupting customer operations and resulting in several temporary closures of our branches. On a year-over-year basis, D-NOW revenue was up 55 million, or 10%. Second quarter gross margins were 22.6%, impacted primarily by higher revenues and lower product margin OCTG tubing pipe sales tied to customer work over rig programs and to a lesser degree from increased bidding as product availability has improved in the market and geographic revenue mix as historically higher gross margin Canadian revenue was lower. And for the second quarter EBITDA was a solid $47 million or 7.9% of revenue. Now some comments on a regional basis. In the U.S., revenue was $456 million, an increase of $29 million or 7% sequentially, driven primarily by process, production, and pump packaged equipment sales in our U.S. process solutions business, where sequential sales increased by 20%. U.S. energy revenues increased 2% sequentially, resilient given the market headwinds discussed earlier. Revenue growth was driven by public operating companies focused on oil and NGL production, while activity from independents, private EMPs, and gas-levered public EMPs softened. U.S. energy supply chain customers delivered growth during the quarter as several increased spending from 1Q levels in support of their annual production goals. Williston Basin and Northern Rockies operators coming off a slow 1Q due to weather impacts contributed to sequential revenue growth. We saw activity improving from 1Q as large independents in the Permian ordered PVF for gathering projects and tank battery construction to support 2023 production plans. Our work over rig materials management program contributed to revenue gains as our customers worked to offset production decline curves and enhance oil recovery. our coiled line pipe product sales expanded as we sold products to new Permian and South Louisiana operators. Also, our coiled line pipe offering obtained final AML approval from a large public operator, clearing a key hurdle for future relevant opportunities for use in their gas lift applications. We are seeing increased customer adoption as coiled line pipe provides a safer, cost-effective solution when compared to conventional line pipe, by reducing the number of connections and leak points, minimizing emissions tied to aging infrastructure. We continue to leverage the benefits of our Supercenter model across the U.S. and Canadian energy and industrial areas, with the dual benefits of increasing our market position and enhancing efficiencies. During the quarter, we renewed and extended several key customer contracts, ensuring continuity of existing operations and future project opportunities. We saw some notable project wins in the midstream sector, providing a variety of pipe valves, fittings, pumps, and fabricated equipment to a number of operators. For one of the projects, we provided large bore valves and actuation packages for installation on a natural gas pipeline that will feed Gulf Coast LNG markets. The project will be complemented with a carbon capture and sequestration solution, providing producers with a CO2 offset emissions solution. With a large integrated midstream company, we provided valve and actuation products as well as field service across several upgrades to existing compression stations for the transmission of natural gas on a pipeline project. We also updated one of our MSA agreements with the US midstream operator and are in the process of executing a punch-out catalog e-commerce project. We expanded market share with several private midstream companies by providing actuated valves for new compressor station builds. And finally, we expanded our valve product line reach with a manufacturing partner by providing valves for a midstream energy infrastructure company. Lastly, we had a notable win with a midstream operator as part of their natural gas transmission and underground storage project, supplying seamless high yield line pipe and weld fittings in addition to several fabrication units from our power service group. combined with a local branch support of PVF and MRO material shorts at the construction site. Our U.S. process solutions business expanded to 29% of our U.S. segment in the second quarter due to increased deliveries of lacked units, pressurized vessels, instrument air systems, and pump packages as gathering systems, well site, onshore facility construction, and midstream takeaway activity was hot during the quarter. Operator activity drove demand for a number of our fabricated projects and products as oil and gas operators for separation equipment, pipe racks, water transfer, and measurement products was strong. In several western U.S. states, we have been focused on growing and diversifying revenue from traditional non-oil and gas markets. We are seeing revenue growth and increased demand for our pump products, mechanical seals, and industrial air compressors. During the quarter, outside of oil and gas, we provided products to the food and beverage, pharmaceutical, municipal water, recreational sports, mining, and power generation industries. We supplied water pump skids to a Permian operator for frack water reuse and treated wastewater applications. Overall, this portion of our revenue mix still remains small when compared to our core oil and gas business. We are making progress in expanding our reach while also maintaining our core focus on oil and gas customers. In our FlexFlow business, activity increased for our trailer-mounted jet pump rentals that provide artificial lift solutions for initially completed wells. We completed a new MSA for a key Canadian customer that will further expand existing trailer-mounted rental opportunities on Indigenous lands. In Canada, revenue was $66 million for the quarter, a decrease of 20% sequentially, amid seasonal breakup and off a very strong first quarter that delivered higher than expected revenue from timely project orders. As a result of the wildfires in Alberta and British Columbia, we idled three of our branches due to safety concerns and town evacuation mandates. Most of the EMP companies in these evacuated areas were forced to curtail drilling and construction activities. Highlights during the quarter include revenue tied to an IOC material management program, that resulted in historical peak revenues on a per quarter basis for this IOC. Products provided include PVF and automated valves for a large project tied to LNG gathering infrastructure. We expect continued growth from this operator in the second half of 2023. In Saskatchewan, we expanded market share in the utility sector by onboarding a new gas utilities customer, providing them with a variety of PVF products. During the quarter, we relocated an orbiting branch into our new super center location in Edmonton to consolidate locations and improve operational efficiencies. For international, revenue was $72 million, a sequential decrease of $2 million, a little better than guided, or up $13 million, or 22% on a year-over-year basis. Activity within the UK's brownfield market and export business to West Africa was healthy during the quarter, followed by growth and activity in the Middle East. In the UK, we provided electrical bulks, cables, and safety products from our McLean International business to UK onshore and offshore operators, while securing contract extensions with several IOCs based in the UK and the Netherlands. In Ireland, we were successful in opening up new markets, providing instrument and power cable from our McLean International group for a gas processing facility fed from an offshore natural gas field. In the Middle East, we provide pipe, valves, and fittings to IOCs, NOCs, and a joint venture operation to support oil and gas production projects. And we continue to provide tooling and MRO products to several offshore wind operators as aftermarket opportunities expand in the North Sea. Now I'd like to talk about our decarbonization and energy evolution initiatives. On prior calls, we've highlighted specific project wins in the energy transition space, or what we term energy evolution, because it's clear the transition will take longer than originally estimated. In the refining sector, we have provided PVF products as several of our customers expand their operations to produce biofuels. In the upstream oil and gas sector, we have provided PVF to aging infrastructure projects to reduce methane emissions while providing industrial air compressor packages to replace gas pneumatic systems with compressed air systems. In fact, we generated additional revenue this quarter tied to more greenhouse gas capture projects. We see these types of projects continuing, and now we're starting to see larger, more frequent carbon capture and sequestration opportunities as operators seek to meet their carbon reduction goals by investing in direct air capture projects, gathering and transmission projects, and sequestration projects, mostly being driven by our current customers. On the EV side, we see opportunities for denounced products in the mining and harvesting of rare earth minerals, like lithium, used in the production of EV batteries. This sector can benefit from our pump packages, fabricated process and production packages, and PVF. Our goal is simple. for D-NOW to be a leader in the energy evolution, as a number of D-NOW's current customers are ramping up investment in projects that expand this growing market. During the quarter, we won several CCS projects and an accompanying midstream valve and actuation project for our PBF offerings. We are excited about what the future holds for our recent acquired Ecovapor business, and during the quarter, we grew a number of their leased units sequentially. We are seeing operators realize the benefit in the reduction in Scope 1 emissions attributed to routine flaring at well site onshore facilities due to oxygen contamination of tank vapor gas. Ecovapor continues to add units with their key oil and gas customers in the Rockies, Bakken, and Permian Basin. In the biogas market, we are gaining momentum with Ecovapor in the landfill gas space. During the quarter, we commissioned several units in the RNG end market, and the quotient activity continues to be robust in the second half of the year. Finally, we deployed our EcoVapor emission scout product to an operator in the Bakken, working with a local university and an environmental research center. The goal of this partnership is to educate local operators and industry groups on volumes of gas being flared from well-site onshore facilities. with a particular emphasis on the lower producing sites, which poses an opportunity to capture additional gas streams while minimizing the region's emission footprint. We are investing in energy evolution as a promising market opportunity, one that has growing demand for many of the products we provide today, and it's primarily driven by our current customers. Moving to our Digital Now initiatives, Our digital revenue as a percent of total SAP revenue for the quarter climbed to 48% as a result of the customer and project billing mix on top line growth. During the quarter, we completed four customer B2B integrations that contributed to the increase. On the e-commerce side, we completed a punch-out project with an IOC based in the UK that will streamline and make it more efficient to order products from our McLean International Group for electrical bulks. In terms of capital allocation, on the M&A front, we continue to evaluate a number of deals of varying sizes. During the second quarter, as I mentioned on our May earnings call, we acquired two companies in the U.S. that expand our U.S. process solutions business and serve industrial and general industry and markets, contributing to our efforts to capture share in markets beyond oil and gas. We continue to be acquisitive, pursuing margin accretive opportunities, including prospects, outside of upstream oil and gas, where we occupy a solid footing. During the second quarter, we purchased $8 million worth of shares at an average price of $10.31. To the end of the second quarter, we have repurchased $51 million worth of shares of the $80 million authorized through December 2024. With that, let me hand it over to Mark.