DNOW Inc.

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the D-NOW second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any 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, again, press the star one. Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations. You may begin your conference.

Well, thank you, Rob. Good morning and welcome to D-NOW's second quarter 2024 earnings conference call. We appreciate you joining us and thank you for your interest in D-NOW. With me today is David Cheruchinsky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily 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, August 7, 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 DENOW, Inc., excluding other costs, and diluted earnings per share attributable to DENOW, 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 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 2024. A replay of today's call will also be available on our website in the next 30 days. We plan to file our 2024 Form 10-Q for the second quarter later today, and it will also be available on the website. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. Before I talk about the business, I'd like to recognize the perseverance of our employees through the disruption caused by two recent storms, the derecho thunderstorms in May and the more recent Hurricane Beryl in July. Both storms directly impacted many of our employees, causing widespread loss of power and destruction of personal property. Without hesitation, our DENOW employees selflessly stepped up, extended a helping hand, and supported one another and our communities. I'm impressed with the way we came together to help one another in a time of need. This collective response is emblematic of DENOW's culture and brings me a great deal of pride. In that same spirit of teamwork and community, in the first quarter, we joined forces with Witco Supply, tapping into a talented team with strong leaders and technical expertise who earn deep affection from their customers. Their supply chain design, strength in midstream, world-class sales team, and keen focus on customers piqued our interest when we pursued that combination. The Witco people and culture were a natural fit with how we've transformed D-NOW to live and breathe those same cultural attributes. During this last six months, it's remarkable to see the deep esprit de corps and cultural alignment our team share, elevating D-NOW to expand our value and reach in the market to help fuel greater success together. In terms of highlights for the quarter, there were many. We produced strong earnings, having grown revenues organically in the second quarter despite headwinds. We grew our legacy midstream business, coupled with the onboarding of WITCO, where we have more than doubled our midstream coverage. We are seeing success along our track to double our energy evolution sales in 2024, a key element of our long-term strategy. We generated inventory velocity of five turns in the quarter, a high mark, which is even harder to do in a slowing market. We drove the best DSOs we've seen since 2020, and we produced cash when we expected to consume it, given a substantial cash generating first quarter. And with our quarter execution, we more than funded the share repurchases we made in the quarter. This is great execution by our teams. And now moving to our results. The strength in our second quarter performance was evident against the combination of headwinds from lower gas prices, lower U.S. rigs and completions, and the unfavorable impact from the seasonal breakup in Canada. Second quarter 2024 revenue grew sequentially $70 million, or 12%, from WITCO's full quarter contribution combined with growth in international and in our legacy DENOW U.S. energy centers and process solutions businesses. We generated $50 million in EBITDA for the quarter, strong bottom-line performance, which was aided by 2 million in favorable items not expected to recur in the third quarter. We generated 18 million of free cash flow during the quarter, bringing the year-to-date amount to 98 million, and our trailing four quarters free cash flow totaled 201 million. In North America, onshore oil and gas activity in the U.S. is more challenging than in recent times due to EMP consolidation, low natural gas prices, hampered further by a lack of natural gas takeaway infrastructure, LNG export capacity, and political posturing. Yet we are focused on opportunities where we see growth. And one area we've been focused on is midstream. Our WITCO acquisition further expanded our business in the midstream market. A sprawling, geographically diverse network of LAC units, pumping stations, metering skids, and pipes, valves, fittings, infrastructure, one that is aging and undersized for current and future demands. The midstream market vertically complements our upstream offerings and strengthens our partnership with and importance to the key manufacturers we support. This market provides a steady diet of day-to-day MRO business combined with a buffet of capital projects aimed at de-bottlenecking upstream capacity constraints through the expansion of midstream infrastructure with demand pulled through expanded export opportunities for crude oil, refined products, and LNG. We remain excited about growing opportunities in the energy evolution space where we are seeing more use cases of CO2 and expanded enhanced oil recovery combined with an increasing backlog of CO2 storage permit submissions to coincide with capital investments in CCUS. Direct air capture technology remains promising, currently contributing to our revenue profile as we expect more units to be constructed to reduce the atmospheric concentration of CO2. And in the renewable gas, natural gas sector, our patented process technology from our EcoVapor business offers biogas and landfill gas operators the ability to treat their waste gas by removing oxygen, sulfur, and excess water to meet pipeline transfer specifications. We are making progress in expanding our industrial adjacent markets with increased participation in the mining sector and municipal water and chemicals markets. These target markets align well with our service areas, our current product lines, and present new demand for our process solutions, pump packages, mechanical seals, and field service capabilities. On the international front, with industry experts forecasting continued capital investment and growth in activity in regions like the UK, Norway, Netherlands, Australia, and the Middle East, we believe there's opportunity to improve the profitability of our international business as we strategically increase our focus on specific locations, products, and solutions to provide the greatest value to our customers. Now some details on the business. In the U.S., revenue was $512 million, up $77 million, or 18% sequentially, from the full quarter impact of our WITCO supply acquisition, plus mid-single-digit revenue percentage increases from our U.S. process solutions and our legacy U.S. energy centers businesses. U.S. rig counts contracted 3% sequentially, down 17% year-over-year, as U.S. completions declined 4%, or down 13% year-over-year, both contributing to the temporary slowdown that we're navigating. During the quarter, additional customer consolidations were announced, and for some of our customers, those pending deals have impacted project timing, resulting in funding and approval delays or project timeline shifts. During the quarter, activity with our supply chain services customers improved sequentially, driven by a blend of projects, well maintenance activity, and infrastructure upgrades. We expect some of these larger customers, by design, to curtail their level of spending in the second half like we experienced last year. At our Williston North Dakota Mega Center, we consolidated a number of third-party operating yards to a single centralized yard and expect the consolidation to improve customer service and enhance efficiencies. In the Bakken, we provided PVF to an operator currently one-third of the way through their Refract program, an example of an operator analyzing older shale wells to improve their production through enhanced refracting techniques. In the Northeast, we secured a new materials management and integrated supply contract with a regional utility company who market natural gas, LPG, electricity, and renewable energy solutions. In U.S. process solutions, demand for our products grew sequentially despite lower completions during the quarter. Our FlexFlow H-Pump rental utilization rates remained strong during the quarter, reflecting steady demand for our mobile horizontal trailer solutions used to dispose of produced water, saltwater disposal, and enhanced oil recovery applications. We are further investing in this business to capture market share and service other areas. Our mechanical seal, industrial air packages, and pump service and repair offerings have been a key focus area for growth, and we saw notable progress in the quarter. Executing on our diversification strategy, we added a new pump manufacturer distribution agreement to expand our product offering in the municipal water market. We provided mechanical seals and pumps to several power generation operators. In the mining industry, we secured a supplier agreement from uranium mine operator, and in the chemical processing market, we are gaining traction by increasing our presence to a large installed pump market by offering aftermarket services tied to asset maintenance. Our pump packages, mechanical seals, and field service is a fungible offering, enabling opportunities for diversified growth and revenues across various industrial adjacent markets. In Canada, revenue is $56 million for the quarter, lower 15% sequentially as expected, primarily due to the impact breakup has during the quarter. In the quarter, we noted several wins in industries that helped diversify outside our core market. We secured a three-year agreement to provide vendor-managed inventory for a steel manufacturer and won a notable project with an independent power producer on top of the current day-to-day MRO business. We added a new Alberta-based operator who plans to ramp up activity in the oil sands area and executed a three-year PVF MRO contract with an oil and gas producer. For international, revenue was $65 million, up $3 million, or 5%. The increase in revenue during the quarter was primarily attributed to Middle East projects. Revenue with major oil and gas operators improved sequentially with a majority of revenue coming from brownfield projects as opposed to new infrastructure builds. Electrical products continue to be the majority of products sold by our international segment, followed by pumps, valves, and industrial and safety products. A couple of notable projects include an FPSO project in Australia, an LNG project in Southeast Asia where we supplied valves and fittings. And finally, in Norway, we secured a supply agreement contract from an OEM to provide electrical cable for facilities and new builds. And now a few comments related to energy evolution. Over the last few quarters, we've been delivering PVF products tied to a large-scale gas gathering project that will transport natural gas and re-deliver it to the Gulf Coast markets, including for LNG export. The scope of the project includes a carbon capture portion that will permanently sequester up to 2 million tons of CO2 annually. Across the U.S., we provided PVF products customers use to upgrade existing infrastructure to eliminate methane atmospheric leaks. Many of these initiatives are tied to customer-managed greenhouse gas reduction programs. We are making inroads into the mining sector by providing pumps and pipe valves and fittings products into the soda ash mines and the extraction of lithium to support growth in battery production. Through McLean International in the UK, we provide an assortment of PPE, tools, and electrical cable for a variety of offshore wind projects. We also expanded our sales efforts and secured orders for tools, harnesses, and electrical cable for a new offshore wind customer base in the Netherlands. Moving to our Digital Now initiatives, Our digital revenue as a percent of total SAP revenue was 48%, flat sequentially. With a major midstream customer, we completed systems integration, data visualization, and a punch-out e-commerce catalog project. The enhanced integration will drive a more user-friendly and efficient method of sourcing and procurement for the products we offer to support their operations. With our AccessNow automated and unattended inventory control system, we were able to reduce costs and overall operating expenses for a customer at a downstream chemical facility. And switching to M&A, a key part of our growth strategy, D-NOW is in a great position. We remain debt-free with $197 million in cash on our balance sheet and $579 million in total liquidity that affords a multitude of options to organically and inorganically grow the company and increase value to shareholders. We are in various stages of engagement with multiple targets in our pipeline and are focused on accretive deals where we're the natural operator and where we can add value and increase the contribution of the acquired firm.