DNOW Inc.

Good morning. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the D-NOW fourth quarter and full year 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 Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Thank you, Ian. Good morning, everyone, and welcome to D-NOW's fourth quarter and full year 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 the 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, February 15, 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 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 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 US 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 D-NOW, Inc., excluding other costs, and diluted earnings per share attributable to D-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 fourth quarter and full year 2023. The replay of today's call will be available on the site for the next 30 days. We plan to file our 2023 Form 10-K later today, and it will also be available on our website. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I'd like to start off with the results our team produced in 2023 and talk about how we've laid the groundwork for a great 2024 and a bright future beyond that. A year ago, when we gave guidance for the full year 2023, when our customers projected their budgets and analysts forecast levels of growth, the outlook then was rosier and brighter than how the year actually unfolded. But despite less momentum from the market, it was a great year. In fact, it was our best year yet. Our team produced a kind of one-two punch that will fuel an accumulation growth strategy by driving significant free cash flow while producing solid revenue growth in an historically working capital-intensive business. To demonstrate how strong 2023 was for Dino, let's talk about what we committed to and what we delivered. Twelve months ago, we forecast full year 2023 revenue to increase 8% to 12% compared to the full year 2022. EBITDA was targeted at 8% of revenue. Cash flow from operations was to approximate $100 million or $85 million in free cash flow. First, we said revenues in 2023 would expand between 8% and 12%. That was ambitious, even with rosy prospects. We said revenues would expand 8% to 12%, and they expanded 9% at the lower end of our guide, but in a softer than expected climate. Solid revenue growth. We said we would see gross margin contraction of about 30 basis points, and it was actually closer to 60 basis points. Steel prices were the main drag on gross margins and thus weren't as strong as planned, but given the market, product margins were really solid in comparison to a supply chain strained 2022. 2023 gross margins were 23.1%, really strong, the second best year in our history after 2022. Next, we said EBITDA was targeted at 8% of revenues. That's about how we ended the year at 7.9%. Finally, we said cash flow from operations was to approximate $100 million in the full year 2023, or $85 million in free cash flow after deducting forecast capital expenditures. We said we'd generate $85 million in free cash flow and actually doubled it to produce $171 million in free cash flow in 2023. This beefed up our cash balance to $299 million at year-end 2023, allowing for plenty of dry powder to grow. For these results, I want to thank our employees who work tirelessly by strategizing with our suppliers, managing product flows, being source flexible when there are snags, training our people, planning, and collaborating to provide the level of service and dependable source of products and solutions our customers have come to expect. I'd like to thank our world-class sales team, sales leaders, and our meticulous, conscientious operations pros who are admired for their responsiveness, speed, and accuracy, and sought after for the care they provide to our customers. An organization underpinned by a lean, smart back office of employee caretakers or cheerleaders who promote and defend the brand and protect, outfit, and equip our team to win in the market. For all that was accomplished in 2023, thank you. Despite various unanticipated market headwinds in 2023, we showed demonstrable revenue strength. Most notably, our U.S. process solutions business delivered significant full-year double-digit revenue growth in every business unit to include power service, Odessa pumps, FlexFlow, and Ecovapor brands. I'll talk more about U.S. process solutions and our global energy centers business later. But first, we have discussed the correlation of our revenue to drilling rigs and completions. As more efficient rigs are deployed in the market today, fewer rigs are needed to produce a similar result compared to just five years ago. However, when a highly efficient operating rig goes to work and our customers drill wells, they still require the plumbing and mechanical infrastructure to collect, transport, separate, process, and market oil and gas. And that drives the demand for our pipe, valves, fittings, pumps, electrical, and fabricated process and production equipment. And we're happy about those market dynamics as they are reflected in our performance and long-term outlook for Deno as energy demand is forecast to grow. I'd like to speak with an eye to the future and a longer-term Deno strategy. We are focused on growth, continuing to drive improved earnings, high levels of free cash flow by developing our existing businesses and unlocking new revenue streams by capturing customer investment in midstream energy evolution and adjacent industrial markets like water wastewater mining and chemical processing in the energy evolution landscape we are helping our customers decarbonize by reducing or eliminating routine flaring and as well as the elimination of methane used to power gas pneumatic devices by replacing them with industrial-grade compressed air systems. Over the past year, sales are growing for our EcoVapor Zero-Two solutions in the renewable fuels market, specifically by targeting landfill gas and biofuel RNG facilities. EcoVapor products afford DENOW with an opportunity to provide pull-through product sales in the form of other fabricated products, pump packages, PDF and consumables. We are growing our emphasis on carbon capture and storage markets where significant capital investment is being directed primarily by our current customers. Over the past few quarters, I've highlighted some carbon capture wins as this market begins to gain traction. Looking ahead, we expect 2024 and beyond to provide a more meaningful revenue contribution helping to amplify growth. Leveraging our partner relationships, we have the ability to capture organic growth from several industrial markets like water, mining, and chemical processing. We see organic growth opportunities in water infrastructure investments resulting from U.S. population growth in migration towards warmer areas. For the mining market, we see continued investment in bringing rare earth minerals to market, driven by the demand for EB batteries, as well as other rare minerals used in technology and AI applications. We also see promising opportunities to capture revenue from the chemical processing markets, leveraging our mechanical seal manufacturing partnership that allows us to service an existing installed base of products and deploy our pump field service technicians. Finally, to support our growth strategy, we are highly acquisitive, looking for quality companies that meet our financial requirements, grow earnings, and either further expand our U.S. process solutions business or extend our reach into more diversified markets. I was pleased to announce last week that we entered into an agreement to acquire Witco Supply in an all-cash transaction. the acquisition would bring together two highly complementary businesses and expand D-NOW into the midstream space. We are excited about the opportunities the acquisition will bring and look forward to sharing more detail after the deal closes. But we expect this transaction, when completed, will enhance our earnings and free cash flow profile and strengthen our ability to increase shareholder value. Now I'll hit some financial highlights. Fourth quarter revenue was $555 million, better than expected given market dynamics. In 4Q23, overall gross margin improved to 23.4% sequentially, aided by improved pipe margins, and we also benefited from product mix and additional vendor consideration in the fourth quarter. For the full year 2023, revenues were $2.32 billion, up 9% year-over-year revenues, above our previous quarter guide of an 8% year-over-year increase. For the full year 2023, EBITDA was $184 million, or 7.9% of revenue. Generating $188 million in cash from operating activities, or $171 million in free cash flow in a strong revenue growth period, where our business expanded nearly 9%, or added $185 million is quite an accomplishment. We generally produce stronger cash from the business in years when the market contracts and produce less cash when our business expands. In 2023, we generated one of our best free cash flow years and produced our greatest earnings since going public, while also buying back $50 million in shares in 2023. Now some comments on a regional basis. In the U.S., revenue was $418 million, down 7% or $30 million sequentially due to expected seasonal impacts. U.S. rig count decreased 4%, while U.S. completions decreased 8% sequentially, with the implication being a strong revenue response given the market and seasonal dynamics. Our model supplying products for work over rig activity remained steady in the quarter. helping to buttress revenue declines associated with fewer drilling rigs. Mark will talk about our working capital in the corridor, but I wanted to highlight the significant improvement we saw in working capital efficiencies coming from our Williston Mega Center in North Dakota as a result of our regional fulfillment initiative in the Northwest Service Area contributing to cash flow in the period. Across our super centers, we continue to see improved efficiencies where we centralize inventory at the regional level and limit redundancies in our supply network. In U.S. Process Solutions, demand improved for our pump products, fabrication packages, and rental units. On a year-over-year basis, U.S. Process Solutions business grew 46%, or added $150 million in revenue, with about a third of U.S. Process Solutions' 2023 growth coming from acquisitions. For the fourth quarter, U.S. Process Solutions represented one-third of U.S. revenue, a new high since we created the division. Demand for DENOW's LAC units, separator vessels, and pump skids remained steady from a variety of operators building out tank battery facilities. For our pump distribution businesses, we saw demand increase not only in our core oil and gas markets, but in industrial markets such as municipal water districts, and uranium and lithium mining operations. Aiding our day-to-day business growth, during the quarter we expanded our pump preventative maintenance programs in more areas, expanding market reach, adding incremental revenues at higher margins. We're also seeing increased demand for our horizontal trailer-mounted pumping solutions provided by FlexFlow. When looking at the full year 2023, Flex-flow rental activity steadily increased, with additional opportunities for produced water disposal and transfer. In Canada, revenue was $65 million for the quarter, a decrease of 4% sequentially, primarily due to seasonal headwinds paired with softer project spend. For international, revenue was $72 million, sequentially flat, with strong project activity including about 10 million in international projects in 4Q23 that we do not expect to repeat in the first quarter of 2024. On a full-year basis, international revenue grew 26% as customer investment in energy security, reliability, and affordability continues to grow in oil and gas areas, coupled with continued investment in new and alternative energy technologies. Project activity was strong in Australia and Kuwait, offset by declines in maintenance spend elsewhere. We saw increased activity from several EPCs procuring products for a downstream ethane cracker project. Activity for West Africa remained steady as we targeted added target accounts serviced by our export model in the UK. And for Norway, We supplied electrical cable for offshore platforms, subsea and related surface projects. And finally, a large project shipped in Australia providing electrical cable for an LNG compression project. And now I'd like to make a few further comments related to the energy evolution. We continue to track an increasing number of projects and investment into the carbon capture and renewable fuels markets. In the fourth quarter, we were successful in providing a variety of products for a natural gas gathering project designed to export LNG in combination with the carbon capture storage project. This will permanently sequester up to 2 million tons per annum of CO2. In addition, we continue to win follow-up orders on products for previously announced carbon capture and direct air capture projects. as the scope of work adjusts and day-to-day items are required during the construction phase that were not originally contemplated in the project phase. Turning to our ecovapor business, we saw growth in the corridor from the sale of numerous E1200-02 units to a landfill gas operator used to treat landfill gas and market as RNG. Moving to our digital Now, initiatives. Our digital revenue as a percent of total SAP sales for the quarter increased to 47% as we continue to leverage technology, automate processes, and work with customers to integrate our systems by leveraging digital technologies to streamline the procure-to-pay process. Our B2B e-commerce revenue increased in the quarter as we experienced higher usage from our mobile app users and as we rolled out several consignment programs where customers use our mobile app to acquire material. Growth in e-commerce was also driven by having a full quarter of activity from a customer recently onboarded during the prior quarter. With that, let me hand it over to Mark.