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 first quarter 2024 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. I'd like to hand things over to Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations. You may begin your conference.

Well, thank you, Ian, and good morning, and welcome to D-NOW's first quarter 2024 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 meeting of the U.S. Federal Securities Laws based on limited information as of today, May 10, 2024, 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 a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental financial and operating information may be found within our earnings release on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP, you'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA, net income attributable to 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 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 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 first quarter of 2024. A replay of today's call will also be available on the site for the next 30 days. We plan to file our 2024 Form 10-Q for the first quarter 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'm incredibly pleased with the progress we made in the first quarter, generating strong free cash flow of 80 million towards our 150 million full-year target, which we expect could now approach 200 million in 2024. Free cash flow is represented by cash flows from operating activities reduced by capital expenditures made during the period. Our enhanced free cash flow dynamics are the result of DENOW's pedigree of sound balance sheet management supported by a strong transformed business on a path that could make 2024 our best year yet. Assuming an increase in market activity as modeled and that is on top of a record EBITDA margin years in 2022 surpassed again in 2023, we believe 2024 could top that yet again. Our quarterly cash haul was much better than expected as we guided to negative free cash flow in the first quarter, but instead generated $80 million in free cash flow in 1Q24 and $262 million in free cash flow over the last four quarters, the best trailing four-quarter period of cash generation since 2016. In the first quarter, we were privileged to welcome an onboard WITCO supply to the DENOW family, one of our largest acquisitions yet. and we still ended the quarter debt-free with $188 million in cash. The addition of WITCO's talented team, rich culture, and technical expertise enhances our service levels and capabilities, enabling us to better support our customers' midstream and energy evolution investments. With our first U.S. Energy Center's acquisition since 2015, WITCO Supply expands our U.S. footprint and customer base across the midstream energy sector. WITCO operates eight locations where they've carved out a devout customer following and effectively deploy a supercenter-like strategy where the main active centers of commerce support and embed efficiencies in the fulfillment model. While I have already had the privilege of sharing the best employee-caught and home-fried South Louisiana catfish, shrimp, and rice, with over 100 of our Whitco employees, I'm honored to welcome everyone from Whitco Supply to the Dinau family. The now larger Dinau enjoys a solid balance sheet, an expanding diversified customer base, a proactive approach to seizing value-enhancing acquisition opportunities, and the best people in the business. I'm excited about our future together. We are focused on opportunities that drive a creative growth in operating margins while diversifying our market mix. Our strategy is to defend, invest, and grow our core market, capture additional revenues from the growing energy evolution market, and diversify our customer base by targeting and realizing revenue opportunities from adjacent industrial markets while driving efficiencies across our business. With our current liquidity and capital allocation framework, we have the ability to strike deals at the right time and repurchase shares opportunistically, thus balancing the return of capital with the growth of our business to produce sustainable long-term value for our shareholders. We run our business like a successful gardener might, and I'm often reminded how much the two are alike. We plant the seeds to sow innovative ideas for our customers, and provide the necessary resources for growth. We nourish the soil to foster a collaborative environment that continuously enriches our culture. We water abundantly and fertilize by making prudent investments in inventory, new products, capital expenditures, and process improvements while rewarding our people for the results they produce to fuel progress and expansion. We try to make sure we sell aging inventory before it goes bad and while it's still in season, and offer new products as we liquidate or remove less desirable ones to produce the greatest yield and adapt to changing customer tastes. We seek and promote self-starter leaders who don't wait to act, those who prune to drive efficiencies and trim unnecessary processes, promoting healthy growth and optimized performance. seeking a nexus between where we shine and where the customer sees value. We care about and protect each other, focus on safety, act with integrity, guard our processes and competitive information, and identify and weed out potential threats protecting our business from harm. We're mindful of the seasons and how they're changing affects our garden so we can adapt, embrace change, adjust our tactics as our business evolves and grows. We harvest the fruits of hard work, celebrate accomplishments, and learn from challenges so we can reinvest in our business, make smart acquisitions, and return cash to shareholders, and repeat. You can have an impressive garden or a great business simply by being more disciplined than your competitors, tending in a year like this more stringently to the fundamentals. Now some comments on a regional basis. In the U.S., revenue was $435 million, up $17 million, or 4% sequentially, resulting from the added acquisition activity from Whitco Supply. U.S. rig count was essentially flat quarter over quarter, while U.S. completions declined 11% sequentially and 15% year over year. During the quarter, we renewed a master service agreement with one of our major supply chain services customers that will continue to drive future revenue while presenting opportunities for increased wallet share on their newly acquired assets. With a large IOC activity in the Permian, was robust with an assortment of capital projects and day-to-day maintenance operations. Activity remained strong with another integrated supply customer with assets in the Eagle Ford and Bakken. Punctuating the strength of our supply chain service partnerships, One of our customers recognized the D-NOW team's performance in helping them achieve an important operational performance target, demonstrating the impact our partnership has on delivering their operational objectives. The effect our employees have on our customers' operations is a source of pride as our customers trust us to help them deliver on their production goals. In U.S. Process Solutions, demand for our products was mixed across our brands as MRO and Business continued to grow as we experienced some lumpiness in projects, with a number of those projects pushed to later in the year. Demand for our fabricated process and production equipment remained steady, servicing a variety of operators for the upstream, midstream, and downstream sectors. Demand for our industrial air compressor package offerings remained strong as operators worked to eliminate the venting of methane as they replaced it with compressed air systems. Outside of oil and gas, in the municipal water market, we delivered a large shipment of pumps for a sizable project in North Texas, in addition to providing pumps for a pulp and paper customer, a food and beverage protein company, and chilled water pumps for a Bitcoin data mining facility. During the quarter, we expanded a pump territorial distribution agreement across several U.S. western states, targeting the mining industry. The agreement will create opportunities and complements our current efforts within this growing and market. Demand for our FlexFlow horizontal pump products remained steady as operators sought rental pump assets for produced water disposal and transfer applications. For our EcoVapor line, demand for our sulfur sentinel product increased in the quarter as operators sought solutions to remove H2S from low-pressure gas thus eliminating emissions that would have occurred from flaring the gas. Our EcoVapor rental fleet has been steady despite low natural gas prices. And finally, we tapped into new market share by receiving orders from several new R&G customers as we continue to grow our EcoVapor 02 product line in the renewable natural gas space. In Canada, revenue was $66 million for the quarter. From an activity perspective, the year started off sluggish, where our Canadian operations were adversely impacted by two weather events. In January, there was a nine-day timeframe where the extreme sub-zero temperatures halted activity and delayed the start of the joint season. In March, we experienced an early spring breakup that limited what has historically been a very active month. From conversations with customers, we are hearing drilling plans that were impacted in 1Q24 that, at this time, remain intact for the full year. so we're optimistic that the delayed activity will come later in 2024. We were successful in being selected by a top Canadian producer to provide pipe fittings and flanges and MRO products. The producer had recently acquired a DNOW customer we already service, so we should benefit from that as well. Finally, with the Trans Mountain expansion pipeline expected to come online this month, we expect the increased takeaway capacity could narrow the WTI Western Canadian Select differential and lead to increased future activity for our Canadian business. For our international segment, revenue is $62 million, sequentially lower as expected and guided last quarter by $10 million, primarily due to non-repeating projects in the fourth quarter in the Middle East and Australia. In Europe and the UK, we are seeing steady activity and demand for our electrical and safety products tied to brownfield and modernization investment projects. But we are also observing headwinds in customer investment and traditional energy greenfield investments due to instability caused in part by the windfall test. In Norway, we saw an increase in investment in the Norwegian continental shelf as we supplied electrical cable for offshore drilling contractors and drilling rig recertifications. We are seeing an increasing level of FID projects across a number of EPCs as investment in hydrogen, CCS, and floating wind continue to gain steam. These types of projects require many of the PBF and electrical products we provide. In Australia, we are seeing project activity growing from several ILCs related to CO2 injection, LNG, and biofuel projects. Finally, during the quarter, we provided electrical products tied to a carbon capture project and a lighting modernization project through an EPC for a large energy producer. And now a few additional comments related to the energy evolution. For D-NOW, the energy transition includes activity primarily associated with carbon capture utilization and storage, hydrogen, and RNG-related projects. We are tracking a number of projects in this target market which fit nicely into DENOW's core product offerings. And as we have mentioned on prior calls, many of the projects are being funded by DENOW customers who are familiar with our quality products, services, and solutions combined with our differentiated level of service. In 2023, we submitted quotes and proposals for a number of energy evolution projects, comparing last year's quote activity to this year's first quarter quote activity, the value this quarter has grown and surpassed last year's total quote value. We delivered PVF products for several CCUS projects, one for a gas storage project in support of a low-carbon power plant that uses the gas when other intermittent power generation sources are interrupted. Another energy evolution project in the quarter was for a natural gas gas project. combined with the carbon capture and sequestration component that will remove 100% of the CO2 and permanently store it underground. For our digital initiatives, our digital revenue as a percent of total SIP revenue increased to 49% during the quarter, driving improved efficiencies through integrated systems. With a major IOC, we completed a system integration project that eliminates redundancies across multiple systems allowing for efficiency gains using D-NOW systems, technology, and people in order fulfillment, procurement, and inventory management functionality. For another major IOC, we successfully expanded our customer consignment program, capturing a real-time order processing and inventory visibility through the use of our D-NOW mobile app. We launched FlexFlow's OptiWatch 2.0, our second-generation digital real-time monitoring and optimization software for horizontal pumping system that includes enhanced data sampling combined with an upgraded dashboard visualization that has been well received by OptiWatch customers. Operators are realizing financial benefits for reduced expenditures in power consumption, maintenance, and downtime, and other efficiency gains from using OptiWatch 2.0. And finally, our process solutions field service technicians have been equipped with new digital tablets that are connected to our ERP service app, thus eliminating manual paperwork while streamlining work orders to deliver efficiencies through digital transformation on aftermarket service orders. With that, let me hand it over to Mark.