DNOW Inc.

Hello, good morning. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the D-NOW third 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 star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Brad Weiss, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Thank you, Jeremy. Good morning, and welcome to D-NOW's third quarter 2023 earnings conference call. We appreciate you joining us, and thank you for your interest in D-NOW. With me today is David Cherchensky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate under the D-NOW brand, which is also our New York Stock Exchange ticker symbol. Please note that some of the statements we make during this call, including 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, November 2, 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 the latest Forms 10-K and 10-Q that D-NOW has on file with the U.S. Securities and Exchange Commission for 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 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 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 the earnings release. As of this morning, the investor relations section of our website contains a presentation covering our results and key takeaways for the third quarter 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 third 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. The nine months ended September 30, 2023 represent our best earnings performance for the first three quarters in a year since being a public company. In a strong but arguably smaller market this year versus last year, In a period without the pricing propulsion due to product scarcity we enjoyed in 2022, our employees defied gravity again. Our teams produced a notable revenue resilience, giving me great comfort that the singular focus on our customers continues to pay off and accrue to the long-term benefit of our company and its shareholders. Despite North America rig counts being up just around 1%, When compared to the first three quarters of 2022, our year-to-date revenues for the first three quarters of 2023 are up 11% in that comparative period. In a business where the most important defining feature is its people, these results exemplify, in fact, leave me no doubt, that D-NOW enjoys having the best professional women and men in our industry. And our customers and shareholders benefit from that distinction. While there are headwinds, we've adjusted our sales to harness the wind efficiently and productively as we navigate the fourth quarter, where we expect a seasonal slowdown as some customers have overspent their annual budget in the first half of the year, with the impact showing up in the third and fourth quarters. For the third quarter 2023, we generated $588 million in revenue, up 2% compared to the same period in 2022. Sequentially, revenue declined 6 million, or 1%. The U.S. represents 75% of our revenue. For the third quarter, sequential U.S. revenues were resilient, down 2%, despite the U.S. rig count decline of 10% during the quarter. Many believe we are approaching the bottom, both in terms of market activity, as reported by the level of operating drilling rigs, and in terms of deflationary pricing on line pipes. For example, pricing on line pipe has declined for 17 consecutive months, as reported in the November PipeLogix report, but the rate of decline slowed significantly compared to September and its slowest rate since prices began to fall in May of 2022. Even with these dynamics, our sourcing team, in combination with sales and operations, has done an outstanding job proactively managing the appropriate inflow and disposition of pipe inventory. Third quarter gross margins were up 20 basis points to 22.8% as we proactively managed our pipe product lines and optimized product mix from growth in our U.S. process solutions business. And for the third quarter, EBITDA remained strong at 46 million or 7.8% of revenue. In the U.S., revenue was 448 million, a decrease of 8 million or 2% sequentially, due to drilling and completions activity impacting pipe and valve project sales in the period. U.S. Energy Center's revenues decreased 3% sequentially, better than the 10% decline in U.S. operating rigs. Our increasing traction in the energy evolution space provided further gains for DENOW as customers trust DENOW solutions and products to support their projects in growing both renewables natural gas or RNG and carbon capture and storage markets. To name a few examples, we provided pipe valves and fittings or PVF for a plant expansion that increases the CO2 capture per year by an additional 1.5 million metric tons. The CO2 is transported by the customer through a pipeline and is injected into an underground sandstone storage site one mile beneath the surface. We provided PVF to a long-term oil and gas customer for their carbon capture plant expansion that will capture an additional 1.2 metric tons of CO2 per year upon completion. We continue to grow our carbon capture revenues with both new and legacy customers. As a third example, we continue to see incremental PVF revenues tied to a carbon capture project from a gas utility customer who we highlighted last quarter. We are seeing more investment in CCUS-type projects in the U.S., and we've seen increased opportunities with our current customers who trust D-NOW's model of integrity and supply chain expertise to achieve their respective decarbonization goals. The burgeoning CCUS market is currently at the early stage of a multi-year growth cycle, and our strategy is focused and positioned D-NOW as a leader in this space. We added revenue from the implementation of a new material management program with an IOC's midstream operating gas plant. We expect revenue with this customer to grow as more sites are onboarded. Also, we expanded revenue and market share by securing a new three-year MRO contract with an operator in the Rockies. Revenue from our work over rig programs remain steady in the quarter. Our customers tell us that our work over rig program not only provides them with efficiencies to get products to market, but it also helps lower scope to emissions that would have otherwise been emitted using a more traditional logistics model to support well-maintenance programs. And our Supercenter model provides us the ability to onboard new customers without increasing roofline expense. In the Northwest, our Williston, North Dakota, and Casper, Wyoming Supercenters are growing and enable D-NOW to expand regional project revenues. We experienced revenue growth with several large operators on project winds tied to gathering projects, centralized tank battery builds, and midstream compressor stations. We provided actuated valves to several EMPs and midstream companies, as well as centralized tank battery projects to operators in the Powder River and Uinta basins. We continue our project and day-to-day success in the midstream sector providing a variety of PVF, pumps, and fabricated equipment to a number of operators. And we extended a two-year line pipe agreement with the gas utility customer. Our U.S. process solutions business grew to a record 30% of our U.S. segment in the third quarter. Demand for delivery of LAC units, pressurized vessels, instrument air systems, and pump packages remained high as operators completed gathering systems well site, onshore facilities, and midstream takeaway projects. Midstream inquiries and activity remained high as customers tie in upstream production and evaluate projects. In non-oil and gas markets, we were successful in capturing revenue by providing several large pumps to a Rockies brewing company. We also provided several vertical turbine pumps to a wastewater treatment facility. In the mining industry, we provided pumps, compressors, and specialty valves in mines where rare earth minerals like lithium, trona, copper, and gold are extracted. Our industrial air compressors saw demand improve in the food and beverage market as we provided units to customers in several states. In our flex flow business, we are seeing increased activity for our trailer mounted H-pumps for produced water disposal and for jet pump rentals, which provide primary artificial list solutions for initially completed wells. Demand increased for our EcoVapor 02 oxygen elimination equipment as we sold a number of units used in the purification of biogas from sources such as swine and dairy farms, as well as gas collected from landfills to be sold as renewable natural gas. We also sold a number of sulfur sentinels, EcoVapor's H2S removal units to major producers at well-site onshore tank battery facilities. Our EcoVapor solutions are becoming a key component towards advancing our customers' ability to reduce their emissions footprint from upstream oil and gas sites. Furthermore, our EcoVapor product line continues to expand into the renewable natural gas space using their natural gas upgrading technologies to help landfills as well as dairy and swine farm operators convert their bio-waste emissions into sellable RNG. In Canada, we further enhanced our fulfillment model thanks to the incredible hard work and planning from our teams as we hosted a successful grand opening event for our new Edmonton NISQ facility in September. It was well attended by our customers, suppliers, internal teams, and dignitaries such as a local member of the Legislative Assembly. The Supercenter infrastructure is designed to regionally grow revenues efficiently. Canada revenues were $68 million for the quarter, a 3% sequential increase. The third quarter revenue was lower than expected due to disrupted market activity as crude production fell to the lowest level in several years amid maintenance at oil sands mines and continued takeaway capacity constraints. And as a result of wildfire outbreaks, several of our top Canadian oil sands customers were forced to shut in production during the second quarter, resulting in lower production and the delayed startup of drilling completion activities post-spring breakup, impacting Dena's revenue during the third quarter. Despite that, our Central Canada fiberglass business strengthened as we added new customers, and saw shipments increase the way we would expect exiting the freeze-thaw period. For international, revenue was $72 million, sequentially flat, and up $16 million, or 29%, on a year-over-year basis. Our most active regions continued to be the UK, Middle East, and Australia, and all three remained essentially flat, sequentially. Grid counts internationally declined three months in a row, but offsetting that reversal were specific project deliveries in the third quarter. Activity in the CIS area saw demand for specialty alloy valves that will be delivered over the next several quarters. On the notable WINS front, D. Nowell-McLean secured a multi-year contract with an IOC to provide LED lighting upgrades in many of their existing operating facilities. In Australia, we provided electrical cable to an operator for a renewable project. In the Middle East, we provided coated steel for flow line projects tying in their newly drilled wells in the Joint Operations Wafra Zone and coiled line pipe for a gathering project in Abu Dhabi. Moving on to our digital initiatives, our digital now revenue as a percent of total SAP revenue for the quarter was 46% versus 48% in 2Q23, a result of customer and project billing mix. We went live on an e-commerce implementation with a US-based EMP during the quarter with over 100 users, complete with customized B2B approvals that use our shop.dnow.com channel to procure PVF and MRO products. During the quarter, we invested in our day-to-day operations by modernizing the technology used at our super center and branches to improve the productivity of our people. By deploying a new warehouse mobility device, our employees are able to reduce the time and effort required to create sales orders, perform picking, packing, shipping, and receiving activities. In addition, the mobility device is used to improve inventory accuracy. The new devices are significantly faster, smaller, are more efficient, and easier to use than the prior units. The new technology enables D-NOW to enhance fulfillment processes by providing improved levels of digital security while enabling higher levels of efficiency and combining state-of-the-art digital technology with mobility. In terms of capital allocation, we continue to actively pursue M&A opportunities with focus on larger deals that will allow us to enter new markets and diversify our product offerings. We are steadfast in our commitment to seek margin accretive opportunities in diverse end markets and emerging technologies to enable us to capitalize on market trends and to enhance durability in our performance in a dynamic and evolving energy landscape. During the third quarter, we repurchased $5 million worth of shares at an average price of 1065. Through the end of the third quarter, we purchased $56 million worth of shares out of the $80 million authorized through December 2024. With that, let me hand it over to Mark.