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.

Thank you, Dave, and good morning, everyone. Total second quarter 2023 revenue was $594 million, up $10 million or 2% from the first quarter of 2023. On a year-over-year basis, second quarter revenue was up $55 million or 10%. EBITDA, excluding other costs, or EBITDA, for the second quarter was $47 million or 7.9% of revenue. And year-to-date, 2023 EBITDA was $94 million or 8% of revenue. The U.S. revenue for the second quarter of 2023 totaled $456 million, a $29 million increase, or 7% higher than the first quarter of 2023. Year over year, U.S. revenue increased $48 million, or 12%, from the second quarter of 2022, and increased 19%, or $141 million, from the first half of 2022. In Canada, for the second quarter, revenue totaled $66 million, a decrease of $17 million, or 20%, from the very strong revenue in the first quarter of 2023, down as guided. And year over year, Canada's second quarter revenue was down $6 million, or 8%, impacted unfavorably by $3 million, or 4%, from foreign currency changes. International revenue for the second quarter of 2023 was $72 million, down $2 million, or 3% sequentially. And compared to the same period last year, international second quarter revenue was up, increasing $13 million, or 22%. Gross margins for the second quarter were 22.6%, which is down sequentially 90 basis points, some factors contributing To lower margins, as Dave noted earlier, include OCTG, tubing margin compression, improved product availability on steel pipe and valves, which contributes to competitive pricing pressures, and geographic segment revenue mix on lower Canadian revenue. Warehousing, selling, and administrative, or WSA, for the quarter was $98 million, $4 million lower sequentially. partially due to reduced legal expenses of $3 million and a second quarter favorable impact of a million-dollar asset sale gain. In the second quarter, we reported $6 million of depreciation and amortization expense. In the third quarter of 2023, we expect quarterly depreciation and amortization expense to total $7 million. Moving to operating profit by geographic segments, in the second quarter, the U.S. delivered $29 million in operating profit, while the Canadian and international segments delivered operating profit dollars of $3 million and $4 million, respectively. Moving to income taxes, the effective tax rate for the three months ended June 30, 2023, was 2.9% on a gap basis. I remind you, This is the effective tax rate that is calculated from the face of the income statement and is below the typically expected tax rate at these earnings levels due to the income tax expense provision on the income statement, which includes a favorable tax benefit from the changes in the tax valuation allowance on our deferred tax assets. As such, this is why when imputing our non-GAAP tax rate, we exclude such income tax benefits For modeling purposes, the non-GAAP effective tax rate was approximately 26% for 2Q-2023. And for estimating an effective tax rate for the go-forward quarter and year, for modeling net income excluding other costs, could approximate 28% tax rate and excludes the favorable impact from changes in the valuation allowance. Net income attributable to NOW, Inc. for the second quarter was $34 million, or 31 cents per fully diluted share. And on a non-GAAP basis, Q2 2023 net income, attributable to Now, Inc., excluding other costs, was $27 million, or 25 cents per fully diluted share. Moving to the balance sheet, at the end of the quarter, we had zero debt and a cash position of $203 million. Cash increased by $35 million in the second quarter while we completed two acquisitions, invested in growth of our business, and repurchased common stock in the quarter to return value to shareholders. We ended the quarter with total liquidity of $584 million, which comprises our net cash position and $381 million in additional credit facility availability. Our existing $500 million revolving credit facility extends into December 2026, providing D-NOW with access to capital for the next three and a half years. Accounts receivable was $417 million, a decrease of $5 million from the first quarter. With inventory, $424 million at the end of the second quarter and a quarterly turn rate of 4.3 times. Accounts payable was $364 million at the end of the second quarter, an increase of $41 million from the first quarter. And for the second quarter of 2023, working capital, excluding cash as a percentage of our second quarter annualized revenue, improved to 15.6%. In the second quarter, we generated $85 million cash flows from operating activities, consisting of the second quarter earnings contribution and reduced working capital. In the second quarter, we generated $79 million in free cash flow with capital expenditures for the second quarter of $6 million as we primarily purchased property and rental equipment. For the six months ended June 30, 2023, free cash flow accumulates to $68 million. And for the trailing 12 months, free cash flow has totaled $116 million. We have been targeting $100 million in cash flows from operating activities in 2023, and with our strong performance this quarter, we are raising our expectations to $120 million in cash flows from operating activities this year, and will deliver an excess of $100 million in free cash flow in 2023. This demonstrates how our focus on the fundamentals and discipline managing the business has positioned D-NOW to generate cash through the cycles. which bodes well for future growth and capital allocation plans. We continue to execute on our share repurchase program that is authorized through December 31, 2024, with additional repurchases of $8 million in the quarter. As of June 30, 2023, we have repurchased $51 million under our $80 million authorized share repurchase program. Our commitment to growing the company through organic growth and acquisitions remains a key priority. 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. We continue to be debt-free, have no interest payments on debt, and keep cash flow generation a priority. And with that, let me turn the call back to Dave.

Thank you, Mark. Now switching to our outlook for the third quarter of 2023. In the U.S., we expect revenue to be flat due to U.S. rig count headwinds and project mix as compared to the second quarter. Internationally, we expect project activity to increase in the third quarter, driving modest sequential growth in that segment. And in Canada, given expected seasonality, coming out of breakup will drive sequential revenue higher. Taken all together, we expect D-NOW's third quarter sequential revenues to increase in and the low single-digit percentage range from 2Q23, approximating year-over-year third quarter growth of 5% for DENOW. We expect third quarter EBITDA to approximate 8% of revenues. And for the full year 2023, we reaffirm our view that revenue will increase 8% to 12% compared to the full year 2022 revenue. U.S. rig count has been declining since the fourth quarter last year, and we believe it could bottom during the second half of this year. Before we open it up for questions, I want to close with some comments about the business. D-NOW is in a great place with no debt and $203 million of cash on our balance sheet. We continue to expand our core market while we invest and grow in areas where we see opportunities, areas tied to investments in decarbonization and the energy evolution, but also non-oil and gas areas like mining, municipal water, food and beverage, and general industry are focal points. I am proud of our D&L team as strong performance continued in the second quarter, generating $47 million in EBITDA and resulting in our most profitable first half of the year since being a public company. In the second quarter, we produced strong free cash flow of $79 million, completed two acquisitions, and recorded an impressive 22% year-over-year growth in our international segment. I'm excited about the traction we are making positioning D-NOW as a vital energy evolution partner, deploying our full suite of supply chain management services and decarbonization products and technologies, including our EcoVapor offering, to provide our customers the innovative emissions management solutions necessary to achieve their sustainability goals. We are focused on executing our strategy and creating shareholder value by growing market share, leveraging our debt pre-balance sheet with $584 million of total liquidity, pursuing margin accretive acquisitions, and continuing our share repurchase program. With that, let's open the call for questions.

Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster.

Our first question is from Nate Jones with Stifel. Your line is open.

Hi, good morning. This is Adam Farley on for Nathan. Hi, Adam. Good morning. I wanted to start with the outlook in the U.S. So recounting drilling and completion activity does appear to be moderating, but on the flip side, oil prices kind of rallied in the quarter, staying at $82 on WTI. Okay. You know, what is your expectation for activity in the second half and, you know, particularly into the fourth quarter as well? Thank you.

Okay, so in the U.S., we guided sequentially to flatness. And so what we're seeing in the market in the U.S., although the second quarter for us was very strong, it led our global growth for the period. We saw rig counts in the first quarter declines 2% sequentially. We saw rig count in the second quarter decline 5% on top of the 2% decline in the second quarter. And quarter to date, we're seeing rigs decline pretty quickly. So, you know, we use the term around here, we're defying gravity. We see, you know, a main source of revenues, you know, rig activity and completions activity, that's a pretty good benchmark for revenue opportunities for the company. We're seeing that slow down. So, you know, we're leveraging our strengths with our super center and our market share. And we think despite what we expect to be further erosion in the size of the market in the third quarter, we think we can, quote unquote, defy gravity in that period. So we're focused on leveraging our strengths. And our strengths are proximity to customers we have a large streamlined branch business and then we punctuate fulfillment and focus on our customers and big customers in the in the super centers and that's where we're we're picking up projects where we have the right kind of product availability and and we're making gains there to mitigate some of that what would historically drive more revenue declines than we've experienced. In fact, we've grown in the first quarter and the second quarter. And now again, we're calling for growth in the third quarter, except in the U.S. So we're kind of pumped about where we sit in the market, but we are seeing things slow down in the third quarter. Some of our customers are saying that they may see or they expect rigs to bottom in the third quarter or the fourth quarter. So that's That's not, you know, we don't really know how that's going to play out. But we're simply focused on the fundamentals. We're seeing our competition in a period where they're, you know, we have more market share, we're better positioned in the market, our competition is competing on price, and that showed up in our gross margin line. But that's kind of how we see the cadence of the second half. We expected the market to be a little smaller. And we expect our punch in the market to be more impactful and, you know, to pick us from sharing the process.

Okay, thank you for that, Colin. That's very helpful. And then following up on that gross margin commentary, there are a couple of moving pieces. I understand that gross margin is expected to moderate through the year. Maybe you could just help me with, you know, what is a sustainable level for gross margins as supply chain and inflation normalizes?

Yeah, I think given where we're at kind of in the market. So we're seeing this rig count decline, and we're seeing a little more ferocious pricing on bids against our smaller competitors. So we're feeling some pain there in the gross margin line. I don't think this will be the sustained level of margin like we posted in the second quarter. I think it will get a little better. But that may happen after we see the bottoming of completions activity, of rig counts, et cetera. To your opening comment about oil prices being where they're at today, we see that as encouraging, of course. And we think, given that some of the joint contractors and some of the operators saying that the bottoming should happen in the third or fourth quarter, we think that will accrue well to us going into the new year. And we just don't know exactly how it's going to impact the third and fourth quarter. But I don't think this is the ongoing level of gross margins going forward. But there is going to be a little competitive spirit happening in the second half of the year. And, you know, we felt it and it shows in our numbers in the second quarter.

Okay. Thank you for taking my questions. Thanks, Adam.

The next question is from Jeff Robertson with Water Tower Research. Your line is open.

Thank you, Dave. You talked about process solutions revenue. I think it was up about 20% from the first quarter of 23, and it looks like it was up over 50% from the second quarter of 2022. Is the mix of products that you all are supplying to customers mean that your revenue is becoming a little bit decoupled from the actual bid count and more related to just ongoing projects that your customers are working on?

Well, I think what we're seeing in process solutions, so we've made a few smaller acquisitions there. That's helped a little bit. I think on a year-over-year basis, acquisitions may have added about $14 million in revenues in the second quarter. Sequentially, I think it was $3 million, so it's kind of a small impact. But where we're really seeing things come together there is, first of all, we do see process solutions kind of lag our branch energy center business. So where we've seen the energy center business grow at a lesser rate each successive quarter for the last few quarters, process solutions is really hitting its stride. In the middle of 2019, we bought a company, a fabrication company here in the Houston area. They are... denying orders from large customers because we don't have the capacity to fulfill them. We're in a really sweet spot where the demand is really strong. Our order book had grown to a pretty high level, and now we're really enjoying the benefits there. So process solutions, we kind of see that growth later in the cycle, and if you look at the numbers over the last several quarters, you'll see that, and we'll see the growth extend beyond what we experienced in the energy branch business. But we're doing large projects for customers, primarily our largest customers, that straddle our energy center business and our process solution business. That's kind of filling up our shop. But, Brad, is there anything you want to add there?

Thanks, Dave. Jeff, I'll just make some comments on, you know, in our fab shops that we have in Casper and in the Houston area, you know, as rigs increase, we generally provide more kind of separation equipment in the kind of the upper upstream tied to the tank battery facility. And as Dave mentioned, you know, the lagging effect, you know, as that production has come online over, and really talking about last year as rigs increased, then you start seeing the midstream build out. So we're really enjoying the kind of the midstream build out and our process solutions business, as well as our energy business and our valve and actuation business. I think midstream grew sequentially in the quarter. And these are LAC units, a lot of measurement type equipment that we sell to not only integrated midstream providers, but also more regional and privates as well. So a little bit of a lag on the timing, but on the gathering and transmission side, very strong activity right now, and we don't see the midstream activity really abating at least the second half of this year.

Dave, you talked about decarbonization and the energy evolution and where now it's positioned with existing customers. Can you share any color or your thoughts on where you think that market could go over the next couple of years as companies start breaking ground on the projects that they have on the drawing boards?

I'll start with the answer, Jeff. So, you know, we've been pursuing this market for probably 18 months or so now. We've established a department that's squarely focused on it. And in this process, in the early years, parts of energy evolution, as we call it. We attended conferences and heard from customers and collaborated with customers and kind of went from a rhetorical stage, where it was largely a lot of talk and budgeting and planning, to a PO stage. And we're starting to see things take off. Now, what it's going to grow to and what the possibilities are, I don't think we know yet. I think we think it's big for us. But just to give you some examples, you know, we've had some 400,000, 800,000 smaller orders over the last year or so. But now we're starting to see some five, six, $7 million orders. And we expect to see more of those. So we're starting to see some big projects where we are largely sourcing from the same suppliers with similar or the same products. to our existing customers. So it's a natural, convenient adjacency for us that we intend to exploit. So that's a focal point. It's hard to kind of measure what it's going to grow to, but we're excited about it as being a nice supplement to our existing core business.

Excuse me. And lastly, I guess, you talked about Ecovapor and the increase since you all announced that acquisition. Are you having any trouble keeping up with demand for that product? And are you seeing more inquiries or applications from customers than you might have even thought about when you made the acquisition?

Yeah, Jeff, this is Brad. I'll take that one. Maybe Dave or Mark got a comment on top. But at the moment, we're keeping up with demand. We're leveraging our fabrication system. business internally to build some units for Ecovapor, where prior to the acquisition, they had outsourced those. And, you know, we have, if you look at the The dual value proposition that Ecovapor provides in the oil and gas sector, Dave mentioned that our leases have grown. We also have sold units to oil and gas operators. We expect that to continue to expand even with gas at a sub-three level just because of the scope one reduction of a lot of those oil and gas operators can leverage and report through their sustainability efforts And then as gas prices increase over time, you know, that gas that's captured, the operators can sell that back and generate some revenue. On the renewable natural gas, so landfill gas, you know, the dairy and swine farms where we're, you know, we're collecting methane and... We have a fairly active business development effort to really expand that effort within R&G. We commissioned a number of units during the quarter in R&G. They tend to be larger units than in the oil and gas phase, and we typically sell those units instead of lease them. So there's really no capex associated with that growth in that sector. So we like, we love that market. We see that expanding. and if we have trouble keeping up with demand, that would be a good problem to have there.

But at this time, we're not.

Thank you.

Again, that's star one. If you'd like to ask a question, the next question is from Doug Becker with Capital One. Your line is open.

Thank you. Dave, the North America guidance was really encouraging given what's happening in the rig count Could you provide any color about just how July's look to get increasing comfort with that outlook?

Yeah. Now, July, so the way we, this is the quarter, kind of contours of the quarter. July is going to be the shortest month. And because of July 4th, it has fewer business days. August is the big month. So it's really hard for us to get a solid read on the quarter. But it's starting off good. We think our revenue guide is promising, and, you know, we feel good about that. August is going to be the big test. It's the biggest month of the quarter. And then September we tend to close strong in the third month of the quarter. Our customers try to clean up things before quarter end. But we feel good about where we stand right now. You know, the timing of projects is going to matter. So I talked a little bit about some of these larger projects we have If some of them slip into the fourth quarter, that will help us in 4Q, but could hurt us in the third quarter. But it looks pretty strong. Visibility gets a little murky beyond that. But, you know, in the U.S., like I mentioned earlier about process solutions, especially in our power service group, we do have capacity constraints there. And that's, you know, bad because we're having to push away some orders, but it's good because... we're able to really maximize the utility of those locations and generate some good earnings. But we feel good about where we stand right now. And if you look at what's happened in the market the last few quarters in the United States, we really feel good about our market position because to beat to death the term defined gravity, we feel like we're well situated. We've got the right people. we could tell by what's happening with some of our competition that we've got the right model and we're going to exploit it.

It's definitely an interesting departure from history. Maybe a little bit on the cash flow outlook. Continuing to generate more than I think most expected this year. Would you attribute this last upside just to ongoing working capital efficiencies or is there another driver you'd call out?

Well, there's a few things. Our accounts payable grew in addition to earnings, of course. Our accounts payable grew in the second quarter. We were intentional about that, so that helped us. But our DSOs got better. Our inventory grew, and we think there's some opportunity to bring that down in the coming quarters. There'll be a push for that, and our DSOs have some improvement as well. But steady earnings grew. a real organizational focus on generating free cash flow across the company should yield better primarily better DSOs and inventory by the end of the year inventory reductions to keep that level or to keep free cash flow as a big strong component of our balance sheet management in the period but You know, like we said, we generated $68 million in the first half. We do expect the third quarter to be narrower. We don't expect much cash generation in the third quarter. We think we'll generate in excess of $100 million in free cash flow for the year, and the balance of which will largely happen in the fourth quarter.

Okay. And then I think I caught that digital was 40% of revenue in the first quarter, second quarter rather, which is a pretty big bump from the first quarter. I want to make sure I caught that right and just maybe drivers and the implication maybe on margins longer term.

Well, I think the biggest – and Brad can correct me if I'm wrong, but I think the biggest impact was some of our biggest digital customers simply bought more. So it helped – It helped the mix in terms of measuring how much of our activity was digital. I think that was the main driver. Plus, we're focused on onboarding more customers. We have a long list of customers who want to be added to our digital processes. It helps them manage their payables and process payables, invoices, et cetera. It helps us manage the process as well. And we actually have a backlog there. So we've onboarded some more customers as well. That's a key focal point. Did I miss anything, Brad?

No, I think that captures it. We've been, for the past several quarters, been really focused on integrating large punch-out customers that do centralized buying through our platform. And then, of course, just working with each customer individually to... identify workflows and efficiencies and doing some e-business integration, it takes both parties. So those projects do take time to complete, but once they're complete, they become highly sticky relationships, and then it certainly drives efficiencies across both systems.

Thank you. Thanks, Doug.

The next question is from Jeff Robertson with Water Tower Research. Your line is open.

Thanks. Dave, just to follow up on your comments on EV and mining, are you seeing that as a sizable opportunity for some of your valves and pumps that move water and can handle wastewater?

Yeah, Jeff, this is Brad. That's exactly right. You know, mining has always been one of those end markets that we've participated in, you know, certainly to a smaller extent. We saw a lot of pumps, pump and air compressor units in there out of our process solutions group. We do periodically get some PVF tied to some of that spend. You know, the soda ash mining, you know, the gold mining. And then most recently, you know, you're hearing, you know, with the growth in EVs projected, you know, a burgeoning, you know, lithium domestic, lithium mining opportunity. So, you know, as, you know, ExxonMobil, for example, looking at investments in Arkansas and, you know, for lithium extraction through brine water, I think those are Those opportunities lend themselves well to, A, an existing customer for us, and we have the products currently in our portfolio. It's just a matter of when those projects come to fruition. I think we could certainly capture additional revenue through investment in the mining sector.

Great. Thanks very much, Brad. There are no further questions at this time. Mr. Bradwise, I'll turn the call back over to you.

Well, thank you, everyone, for your questions today and your interest in NOW, Inc. We look forward to talking to everyone on our third quarter 2023 earnings conference call in November. Have a nice day, and I'll turn it back to the operator to conclude our call.

Thank you. This concludes today's conference call. You may now disconnect.