DNOW Inc.

Good morning. My name is John, 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 2024 earnings 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 enjoy your question, press star one again. Thank you. Mr. Brad Weiss, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Well, good morning, John. Good morning, everyone, and welcome to D-NOW's fourth quarter and full year 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 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, February 13, 2024, 2025, excuse me, 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 DENOW 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.denow.com or in our filings with the SEC. In an effort to provide investors with additional information, regarding our results as determined by U.S. GAAP, you'll note that we disclose various non-GAAP financial measures in our earnings releases and other public disclosures. These are non-GAAP financial measures, include earnings before interest taxes, depreciation and amortization, or EBITDA, excluding other costs, EBITDA excluding other costs as a percentage of revenue, net income attributable to DENOW, Inc., excluding other costs, and diluted earnings per share attributed to D-NOW, Inc., stockholders excluding other costs, and finally, free cash flow. 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 fourth quarter and full year of 2024. A replay of today's call will also be available on our site for the next 30 days. Now, let me turn the call over to Dave.

Thanks, Brad, and good morning, everyone. I want to start where I'll end my prepared remarks, with a glimpse into the full year 2025. We are forecasting growth in 2025, despite expectations that the activities that drive our revenues will decline for the third year in a row. We expect we could post our fifth consecutive year of growth despite the potential of three consecutive years of market activity declines expected to the end of 2025. This is notable given the perception that upstream sector headwinds limit growth opportunities for DENOW. I'm confident in our ability to overcome these headwinds because of my fellow employees. As we close the books on 2024 and look ahead optimistically, I want to extend my deepest gratitude to our employees for their skills, aptitude, energy, and most importantly, their attitude. The character of our people shines through in the attitude they project, from their unwavering support for our suppliers to the relentless urgency they show in taking care of our customers and help them succeed, to the way they help and encourage each other. acting as cheerleaders for their teammates. These are the qualities that set us apart. This is why we win. We inspire one another. I know this from personal experience. The notes of encouragement and support I receive from employees, these small acts of kindness, mean as much to me as if they were coming from a member of my family. Thank you. Our people are the secret sauce. The elements of our strategy are how we succeed. There are four signature elements to our strategy that afford us maximum flexibility in the market, give us an effective edge on the competition, and provide a winning platform that keep our fellow employees excited about the future. First, the strength in our balance sheet is the signature element, where in the early years of being a public company, say from 2014 through 2020, we turned our working capital excluding cash on average about four times a year. Today, we enjoy working capital velocity of approximately seven times a year. This result, primarily driven by substantially improved inventory choreography enhanced by our Supercenter network, means improved product availability for our customers to help maximize market penetration, reduced logistics costs as we position inventory at the right place in the supply chain, lower inventory expense related to obsolescence and slow movement, And not to mention the resulting boost to gross margins simply from faster turning and less risky inventory. In 2024, for example, it marked the lowest level of inventory provisions that we've experienced as a public company. Second, M&A is D-NOW DNA and is a signature element. D-NOW has completed 23 acquisitions since going public in 2014. With a solid balance sheet, no debt, and a strong cash position, inorganic growth remains a key growth lever, and certainly was in 2024. Our strategy prioritizes margin-accretive businesses, aiming to strengthen and diversify our capabilities in serving our customers. We apply rigorous standards, investing in opportunities where we are the natural operator, poised to create value, increase the contributions of the acquired companies, and drive long-term shareholder value. We are putting substantial M&A muscle into process solutions, a business we built from scratch, growing the business around pumping and moving fluids, which provides the right kind of long-term diversification strategy. I'll talk more about our Trojan acquisition in a bit. Third, self-help and high grading as signature elements. We transformed our business several years ago through a self-help strategy that continues to drive a philosophy of focusing on the things our customers place high importance on and discontinuing the things our customers view as highly commoditized, avoiding the higher operating costs to service those activities, which also happen to be less lucrative for D-NOW. This approach drives significantly improved earnings. and sheds the low operating margin distractions for our competitors to scoop up. In terms of self-help initiatives deployed in 2024, in addition to seeking other efficiencies, we are actively rationalizing IT costs, third-party expenses, vehicle facility and footprint rationalization, in addition to managing T&E expenses. And we aligned our workforce down 12% during the year-end since the year end of 2023, as revenue, when excluding the benefits from the two acquisitions closed during the year, declined about 10% per D now and down 9% in the U.S., in a period where U.S. completions declined 9% and U.S. rigs declined 13%. This self-help responsiveness improved the earnings and cash generation of our core legacy businesses and afforded plenty of free cash flow to fund both our largest acquisition since 2015, and a supersized share repurchase program, which leads into our fourth signature element and the output of the above, durable free cash flow generation through the cycle that fuels our capital allocation options. In the fourth quarter, we delivered impressive results, surpassing expectations in earnings and free cash flow in a challenging environment resulting from a combination of industry headwinds, such as lower U.S. operating rigs, U.S. wells completed, and oil and gas prices. Historically, we discussed how U.S. rigs and completions represent a good barometer to forecast DENAL revenue. However, in a period of increased operator efficiencies, We believe surface production volumes are becoming another important and useful way to gauge demand for our U.S. process solutions pump packages and fabricated equipment, which represent 27% of our U.S. revenue for the full year 2024. That's one reason why 11 out of the last 12 acquisitions we've made have been to bolster the process solutions business. So I'll give some color on our most recent purchase, Trojan, that supports this strategy. Trojan has built a fantastic business with outstanding talent who are unified by a customer-first mindset and solutions-oriented approach to the market. And I'd like to welcome the 90 women and men of Trojan to the DENOW family. Trojan further strengthens and expands DENOW's existing water management solution business, augmenting an already solid DENOW offering through the combination of Odessa pumps, power service, and FlexFlow. all prior acquisitions in our U.S. Process Solutions business. D-NOW is focused on intensifying the growth of process solutions, and after a highly opportunistic and successful WITCO onboarding in early 2024 within energy centers, in addition that assisted D-NOW to double our midstream business to 20% of sales, we resumed accelerated growth in our U.S. Process Solutions business with our addition of the Trojan family. Trojan is comprised of three primary businesses that provide solutions in the water treatment, water sourcing, and water transfer markets. The pump rental offering is comprised of diesel and electric-driven, trailer-mounted centrifugal pumps sought after by customers to solve short-term water movement challenges. Next, Trojan sells lathe, hose, and other products for the water management space, which include pipe, valves, fittings, flow meters, diesel, and electric pump packages, and other items. The third is the Sable automation business. It is a rental-based service and software solution that ties together equipment supplied by Trojan into a turnkey water automation, analyzing, and monitoring solution, which enables customers to increase efficiency, improve accuracy, enhance productivity, realize cost savings, and achieve scalability by outsourcing their water transfer and management needs. Trojan's capabilities, complemented by DENOW's broad footprint and access to capital, provide an excellent synergistic foundation. We believe there are revenue synergies to be gained by introducing Trojan's offering as customers recognize DENOW as a leader in water solutions provider. And now moving to our results. Fourth quarter revenue was $571 million, lower sequentially by 6%, beating the guidance we provided during the last quarter's earnings call. In 4Q24, overall gross margin improved to 23.3%, up 100 points sequentially, aided by improvement in product mix and additional vendor consideration in the fourth quarter. For the full year of 2024, revenues were $2.4 billion, up 2% year over year, our highest revenue year since 2019. a period then that averaged 944 U.S. rigs compared to 2024's market of 599 U.S. rigs. Our full-year 2024 gross margins were lower than 2023, but sturdy at 22.5%, given the pricing deflation in steel products experienced in 2024. For the fourth quarter, EBITDA was $45 million, or 7.9% of revenue, well above expectations. In a year where activity that drives our U.S. revenues declined by more than 9%, our full-year actual revenues grew 2%, achieving more than 99% of the revenue target forecast a year ago. 2024 represents the third year in a row we have delivered at or greater than 7.4% EBITDA as percent of revenues. We generated $119 million in free cash flow during the fourth quarter, an exceptional $289 million for the full year, delivering a 165% free cash flow conversion in 2024. In 2024, one of our best free cash flow years since 2015, but unlike 2015, a year that generated 100% of free cash flow from the balance sheet, 2024's free cash flow haul was amassed from both a solid earnings year as well as efficient use of working capital from the balance sheet. This solid execution, with a smaller market speaks to the success of our strategy. Now some select highlights on the business. Demand for our horizontal trailer mounted pumping solutions provided by FlexFlow remains strong, with leased assets operating in the U.S. and Canada. Our FlexFlow solutions target water disposal applications, hydraulic jet pump oil recovery operations, and recently expanded new markets like downstream refinery applications. On a year-over-year basis, we grew revenues in the energy evolution space by more than 60%, from around $30 million in 2023 to more than $50 million in 2024, and we expect future growth in 2025. The outlook for decarbonization and non-oil and gas energy sources continues to drive investments, with more project FIDs advancing. We continue to participate in quoting activity indicating future market growth, While we acknowledge operators are closely assessing and evaluating any new policy decisions from the administration and its impact on larger scale CCUS and RNG projects related to government subsidies. For our Ecovapor business, the fourth quarter represented the largest revenue quarter in the company's history, fueled by packaged unit sales to operators in oil and gas, as well as renewable natural gas customers. On the rental and service side, we continue to expand our Ecovapor product offerings in the U.S., where demand is improving, aided by an increase in natural gas prices, as well as operators' desire to reduce Scope 1 emissions. In an effort to expand R&G sales, our engineering team has been working closely with customers to design and supply larger capacity units that can process higher volumes of gas. This ability to service a broader range of gas processing volume expands our addressable market in RNG and opens more adjacent markets like agricultural processing and hydrogen production. As D-NOW expands into new adjacent markets, we add new customers, which unlocks an opportunity to provide additional products like PVF, pump packages, and fabricated equipment. Moving to our Digital Now initiatives, Our digital revenue as a percent of total SAP revenue was 47% during the quarter as we continue to leverage technology, automate processes, and work with customers to integrate our systems by leveraging digital technologies to implement highly efficient procurement models. We completed a number of new digital customer integrations during the quarter, ranging from invoice and purchase order integration to centralized procurement via punch-out solutions. These B2B digital integrations increase efficiencies for D-NOW and our customers. As we automate manual processes, it reduces data entry errors and processing time and leads to faster transaction cycles and reduced administrative costs. Furthermore, it improves data accuracy and visibility for both parties through real-time access to information. This integration reduces the cost per transaction and drives cost savings over the long term. And as Mark will discuss, our B2B initiatives also aid in the improvement of working capital. With that, let me hand it over to Mark.