Welcome to the Fourth Quarter and Full Year 2016 Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Senior Vice President and Chief Financial Officer, Dan Molinaro. Mr. Molinaro, you may begin.

Thanks, Sylvia, and welcome, everyone, to the NOW Inc. fourth quarter and full year 2016 earnings conference call. We appreciate you joining us this morning and thanks for your interest in NOW Inc. With me this morning is Robert Workman, President and CEO of NOW Inc.; and Dave Cherechinsky, Corporate Controller and Chief Accounting Officer. NOW Inc. operates primarily under the DistributionNOW and Wilson Export brands, and you'll hear us refer to DistributionNOW and DNOW, which is our New York Stock Exchange ticker symbol, throughout our conversations this morning. Before we begin this discussion of NOW Inc.'s financial results for the fourth quarter and full year ended December 31, 2016, please note that some of the statements we make during this call 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, 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. I refer you to the latest Forms 10-K and 10-Q that NOW Inc. 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 regarding these, as well as supplemental, financial and operating information may be found within our press release, on our Investor Relations website at ir.distributionnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by GAAP, you'll note that we disclose various non-GAAP financial measures in our quarterly press release, including EBITDA excluding other costs, net loss excluding other costs, and diluted loss per share excluding other costs. Each excludes the impacts of certain other costs, and therefore, has not been calculated in accordance with GAAP. A reconciliation of each is included in our press release. As of this morning, the Investor Relations section of our website contains a supplemental presentation covering our Q4 results and key takeaways, which should assist you in understanding our fourth quarter performance. A replay of today's call will be available on the site for the next 30 days. It also should be noted that we plan to file our 2016 Form 10-K later today and it will also be available on our website. Later on this call, I will discuss our financial performance and we will then answer your questions. But first, let me turn the call over to Robert.

Thanks, Dan. Q4 2016 marked the second consecutive quarter of revenue growth for DistributionNOW, the first time since our spin in 2014. However, the growth in each quarter was attributable to distinctly different drivers. Q3 2016 revenue gains resulted from a full quarter contribution of the Power Service acquisition, whereas sequential growth in Q4 2016 was organic and driven primarily by improved rig counts in North America from the early Q3 2016 timeframe. While our business is positively impacted by rig count improvements, drilling contractors who we love, but only represent a small percentage of our North America revenue, experienced the uptick first. The real impact to our top line performance comes from the operators who represent more than 50% of our North America revenues, as they complete construction of production facilities or tank batteries as they are commonly called. After an operator finishes drilling a multi-well pad that could take around two months to complete, they then move on to the frac job where service companies represent an even smaller share of our North America revenues. Once the frac job is complete, which could take an additional 45 to 60 days depending on the number of wells on the pad, DNOW provides several trailers of loads of pipe, valves, fittings, and other miscellaneous items that will be used along with equipment provided by other companies to fabricate the facilities required to process oil, water, and gas. Then, completion of the tank battery could take an additional 45 to 60 days. So, while we enjoy modest revenue growth with the drilling contractors and service companies during the first few phases of exploration and reservoir stimulation, the most impactful revenue opportunity for DistributionNOW occurs many months after the drilling rig arrives on location. Like we always said, oil and gas prices…

Thanks, Robert. It's been over two-and-a-half years since we were spun off into a separate publicly traded company, and the past nine quarters have been quite difficult for our industry. However, I am confident as ever in DNOW and our future. We have the best people in the industry, and I continue to be proud of the efforts of our dedicated workforce as we created a stand-alone, world-class provider of products and solutions to the energy and industrial markets worldwide. I'm proud to be part of this wonderful team, and I'm grateful for the hard work and perseverance of the DNOW family. We will continue to concentrate on the needs of our customers while focusing on producing long-term value for our shareholders. Robert discussed our business, and I'll say more about our financials. NOW Inc. reported a net loss of $71 million or $0.66 per fully diluted share on the U.S. GAAP basis for the fourth quarter of 2016 on $538 million in revenues. This compares with a net loss of $56 million or $0.53 per fully diluted share on $520 million of revenue in the third quarter of 2016. When looking at the year-ago quarter, we had a net loss of $249 million or $2.33 per fully diluted share on revenue of $644 million for the fourth quarter of 2015. It is worth noting, the fourth quarter of 2015 included $138 million of non-cash charges associated with goodwill impairment. The fourth quarter 2016 results included $2 million in pre-tax severance and acquisition-related charges, and $39 million of after-tax charges for valuation allowances recorded against our deferred tax assets. After adjusting for these items, our fourth quarter loss was $31 million or $0.29 per share, both non-GAAP measures. Gross margin was 16.4% in Q4 and for the full year, compared…

Thank you. We will now begin the question-and-answer session. And the first question comes from David Manthey from Robert W. Baird.

Hey, Dave. David J. Manthey - Robert W. Baird & Co., Inc.: Thank you. Good morning, everybody. First off, a question on the EBITDA breakeven levels, if $650 million is the new breakeven and you compare that to the $538 million in the fourth quarter, that $31 million swing in EBITDA would imply contribution margins in the high-20%s. And if you do the same for the $2.1 billion versus $2.6 billion, you come up with something even higher in the 30%s. So, I'm just wondering, is the 15% to 20% contribution margin you're talking about, is that simply conservative or are you thinking about the mathematics differently here?

This is Dave, Dave. Over time, we expect flow-throughs in the 10% to 15% range. We've talked about premium flow-throughs as we begin this recovery. So, getting to that breakeven of $650 million, we think we'll be in the 20% range, as we have some slack in the system we need to reign in and the efficiencies are driven by increased sales. We also believe we'll see price appreciation as we are beginning to see positive trends with extended lead times on products and things that would eventually bring some price appreciation. So, that coupled gets us to that $650 million level. Now, we're guiding to – on a quarter basis, getting to breakeven, we haven't talked about the full year results and what we expect for the full year. David J. Manthey - Robert W. Baird & Co., Inc.: Okay. And along those lines, Dave, when you're talking about inflation on the rise potentially and demand picking up, plus your new pricing tool, is it safe to assume a meaningful uptick in gross margin in 2017 as all those things conspire?

Yeah. I think it will be a noticeable uptick in gross margin. Should come from – our inventory liquidation's been very successful. So, we have – we'll have lower replacement cost on inventory, we'll begin to see vendor consideration increase. We're still in a very competitive landscape, but those things should conspire to drive increased gross margin. David J. Manthey - Robert W. Baird & Co., Inc.: Great. Thank you.

Our next question comes from Matt Duncan from Stephens.

Hey, good morning, guys.

Hey, Matt.

Hi, Matt.

So the first thing I've got just looking at sort of the sequential progression in the business. Robert, you've talked a lot about sort of what the – explained well I think what that lag time is, because you guys are more impacted by tank battery spending. I'm curious if you were still may be also seeing a little bit of pressure in the fourth quarter just because your customers were still operating under their 2016 budgets. And then adding to that is the calendar has flipped to 2017. Are you guys starting to see a more noticeable sequential improvement in sales here?

Yeah. So within Q4, which was an abnormality again, because we normally don't – well, our Q4 is usually softer than Q3. But within Q4, each month of the quarter progressed upward. So December was better than November, and November was better than October. And usually, December is the worst month of the quarter. So we saw growth there. And then as we get into Q1, we're experiencing what you would expect to experience, based on the rig count additions that were – from late Q3, early Q4 being stronger than they were Q2 to early Q3.

So I guess to tie a bow on this, is the growth accelerating as you would expect it to, now that you're kind of through that lag period between when rig count went up and tank batteries get build?

That would be correct.

Okay. Figured as much. And then, back on the sort of incremental margin question, it sounds like you do expect to experience a period here of above your target range, is there any help you can give us on how long that may last? I mean, once you reach that EBITDA breakeven number, is that when maybe it kind of gets back down into that 15% to 20% target range? Just really kind of what I'm getting at here is, how long do you guys think you'll continue to sit on cost before you'll need to start just add people back to make sure you're serving the customer well?

Well, we're currently – there are parts of our business where we are adding people. Robert talked about the contract with Marathon Oil, so there are pockets where we're adding people already. But we do have slack in the system, so it could be several quarters where we'll see flow-throughs higher than what we'd normally expect, it's hard to gauge that. I mean, it depends on the slope of the recovery.

Yeah, I mean, if you look back in 2009, Matt, when we came out of the financial crisis, we had the strong recovery, there was a few quarters, maybe two or three, I can't recall exactly how many, where we had high-20s in flow-throughs.

Yeah.

But I'd be careful modeling that – we talk about 10% to 15% flow through, Matt, I'd keep that in mind that we're going to get back to that pace. And the further out you go, I wouldn't be real aggressive. I'd stick with that 10% to 15% on a longer-term basis.

And the real answer is, Matt, just like it is when we're in a strong downturn, we can't get costs out as fast as revenue comes out. So our decremental flow-throughs are also in that high-20s range. So it's just a function of trying to catch revenue going up or down.

Sure. All right. And then last thing on free cash flow, any thoughts there on what that may look like this year? You talked about inventories have probably bottomed, I'm assuming that we're reaching that point where working capital investment is necessary, just what do you think that looks like from a cash flow perspective?

Yeah. I think we've been pretty proud of the work we've done on generating cash in this down-market. But we've been talking about the inevitable turn when revenue picks up and there'll be some demands on the working capital side. And I think every quarter I keep thinking we're getting near not only the low-hanging fruit, but getting near the end and here again this last quarter we did another $40 million or $50 million, but that is getting slower and slower. And we're going to be turning around spending money very soon, and that's a positive because it means the revenue demands are up and we have to be doing it. So, again, if I'm doing a modeling exercise, I would be very careful with modeling much favorable cash flow into 2017.

Yeah, I mean, just based on whatever revenue you forecast for the business, you can assume that the amount of capital we're going to need is going to be in that 25% or (38:04) range.

Yeah. Okay. I appreciate it, guys. Thanks.

You're welcome.

Our next question comes from Vebs Vaishnav from Cowen & Company.

Hey, Vebs.

Good morning, and thanks for taking my question. So, you spoke favorably about the U.S. revenues, just trying to think about some numbers. Let's say even if we assume a quarter lag in revenues because of the lag you explained, is it fair to assume that U.S. revenues could grow, say, 10% to 15% in 1Q given that the rig count increased 15% in third quarter?

Well, based on what we've experienced so far in the quarter, which is clearly related directly to the rig count adds from late Q3, early Q4, we think that, that puts current consensus on revenue for the business within reach.

Okay, okay, okay. And for Canada, like if I think about the rig count where it is currently, it's almost up 100% versus the fourth quarter average. How should we think about Canadian revenues, the leverage that you have with the increasing rig count over there?

Yeah, I would expect Canada which – with the customers that spend money with us that are related to upstream activity, which will be the operators and the drilling contractors, we had a mass growth in that business. I think I said 50% or something of that nature. It was offset by non-upstream businesses that shrunk. Canada – Q1 is typically Canada's best quarter. Okay? And they'll hit a wall somewhere, either mid or late March, I mean, they are going to hit breakup, and it's going to drop drastically. So the timing of breakup will really affect how Canada does in the quarter, and it's really hard to forecast breakup.

Okay. Like, I mean, 15%, 20% is versus the rig count of 100 like whatever it ends up being, it's not unreasonable to think about as we know now, is that fair?

I don't think I understood the question. Vebs, can you repeat it?

How did the Canadian revenues – I mean, they can grow sequentially 15% to 20% given a significant increase in rig count, is that fair way of thinking or am I missing something?

No. That could be the case.

Okay.

But with the potential offset of something else, but I don't expect the softness we saw in the non-upstream markets to repeat in Q – or get worse in Q1, let's put it that way.

Okay. And last question for me, SG&A, how should we think about SG&A going forward? Do we have still ability to cut cost and first quarter should be lower than fourth quarter, or how are we thinking about it now?

Well, we are going to – there is – well, we're having a recovery obviously in our business. There are places in – many of our areas that are not having a recovery and so we'll continue to work costs down. But with the surge we're having in certain shale plays and with the implementation of Marathon, those expense increases will probably offset the cuts elsewhere.

Okay. All right. That's all from me. Thank you.

Thank you, Vebs.

Our following question comes from Andrew Buscaglia from Credit Suisse. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Hey, guys.

Hey, Andrew. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Can you just talk a little bit about – so your $650 million target now for breakeven, that was a big change from Q3 to Q4. With – I mean, besides maybe just rig counts picking up, what else are you – gives you confidence that you could make that statement? Is it stuff you are hearing from customers, is it general optimism, post election, maybe you can kind of rank file...

Actually what we're hearing from – what's going – the revenue that we're experiencing in the quarter has nothing to do with calculating the breakeven. Basically, breakeven is a function of what we think is happening with pricing and how we're managing our expenses. So that's the driver behind that. So just we continue to pull costs down, we're looking at what we think the flow-through to EBITDA will be on incremental – on the incremental growth from $538 million or whatever the number was to $650 million, and that's how we came up with getting to a breakeven EBITDA. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: And then so on that pricing comment, so last quarter you guys said, at the branch level, you're trying to push prices it's not sticking. I guess now you have this technology is going to help you guys, what – like pricing-wise, it sounds like things should improve, but are you seeing it stick now?

Well, we are seeing some price improvements for some of the commodities where the lead times are extending. But we are also seeing a mix issue, we're selling more pipe today. And pipe generally has low margins, so that's offsetting that somewhat. The pricing tool will help us two ways; it will help us find the right strike price for a transaction which could mean lower, so we get a sale we wouldn't otherwise have gotten or higher. Of course, we bought the tool to help us grow prices. But what we tend to experience in a recovery like we're seeing is a customer focused on the bigger picture and a little bit of distraction and improved pricing resulting from a lot less bidding. Today, we're bidding most of our transactions, and that will ease up as customers' focus shifts. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Okay.

Yeah, I mean, we have pricing agreements in our system for most of our customers. So if you just plug in part numbers and quantities, it automatically prices the customer at the agreed to level that we've set in our contract. And generally, those are fairly good margins. But what happens and what we've just been through this big, this downturn, they may have had a policy before the downturn that said, anything over $25,000 has to go out for competitive bid. They may have dropped it to $20,000, they may have dropped it to $15,000, they may have dropped it to $10,000. So we are in the point – I mean, we are bidding almost everything. And when we get busy again – lead times, service levels, product availability becomes more important, and they start ratcheting back up that bid level because they don't want to waste the time and effort for days and days to go out and get competitive bids, and so they just order the materials. So, that usually helps drive pricing up. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Okay. Okay. All right. That's helpful color. Thanks, guys.

Our following question comes from Joe Gibney from Capital One.

Hey, Joe.

Thanks. Good morning, guys. Couple of questions on U.S. revenue and mix. I was curious as we're sitting here in mid-February, what is the non-upstream portion of U.S. business doing here so far As you intimate, it is up quarter-over-quarter, but just trying to understand how the E&C project, chem plant, utility/refiner bucket is turning so far here in the quarter, and how we should be thinking about that relative to what's happening upstream?

Yeah. So obviously, upstream with the contractors and service companies and operators is where we're experiencing the most growth. Our downstream business is gearing up for some turnaround activity, which will help it grow. But our midstream business is down simply because we had two huge projects that wound down, and they were just a two or three or four quarter kind of project that ended, and so our midstream business is softening in the quarter.

Okay. And on your mix, supply chain and process, so quarter-over-quarter the implication there is supply chain is up 10% or 11% versus 3Q. Just curious, the drivers there, is that just broader organic activity lift that is pulling through here just as it's with everywhere else or is this Hess ramping up a little bit more, just kind of curious if you could speak to that a little bit. And then, process generally flattish, and I think we're expecting a little bit more flow-through coming out of Power Services and some of those POs translating into revenue. You guys have always been pretty consistent in that as more kind of 1Q timeframe, but how is traction in the Permian, how are things going with Power Services there? If you could speak to those, I'd appreciate it.

Yeah. So within our Supply Chain group, there's really three customer types. You've got the shop floor manufacturing supply chain business, you have the downstream chemical plants and refineries, and then you've got our four operator customers. And we had softness in the downstream business in Q4, and the shop floor manufacturing business was basically flat. And so the growth came from two areas. One, increased activity with our two core – our tenant customers, Devon and OXY, and continued implementation with Hess. That's where the growth came from in the supply chain group. On the Process Solutions group, we expected – when in fact we said it on the last call, we expected Process Solutions to bottom out in either Q4 or Q1 based on what we had in our order book. And it turns out that it bottomed in Q3. And I would expect some soft growth in that business into Q1 simply because those orders are usually placed on us when the drilling is occurring, and so they don't have that material delivered to location until after the frac job is complete. So, we got some orders that were not tank battery related in the Process Solutions group, which is Odessa Pumps and Power Service. And we were able to turnaround some of those orders for fluid transfer applications quicker than we thought, and that's what helped us – that's what helped the group grow slightly in Q4 versus Q3.

Okay. Helpful. I appreciate it, guys. I'll turn it back.

Thank you.

Our following question comes from Sean Meakim from JPMorgan.

Hey, Sean.

Hey. Good morning. So, just thinking about that revenue cadence, so the U.S. rig count was up something like mid-teens sequentially in 3Q, low-20%s last quarter, maybe it will be up something like around 20% this quarter. So, you said 1Q consensus seems like it's in reach. I'm thinking – I'm curious if we look under the hood at the mix as you're onboarding some of these folks like Marathon and Hess, how do we think about the mix between energy branches, supply chain, process solutions, and what that mix is doing to top line opportunities versus what the broader market is doing?

I wouldn't expect the supply chain mix to change much because, first of all, it takes many quarters to implement these agreements, so we'll be talking about the one we just received for a while. The other one with Hess is almost complete. And as we grow with those customers in our Supply Chain group, our branches are also growing with all of their operator customers in the area of tank batteries. So, if I was to be a bet man, I would bet that the Energy Center business grows at a more rapid rate than the Supply Chain Services group, because it's just the behemoth, it's the big gorilla. So it's just going to grow dollar-wise more, I would think the ratios might stay similar.

Okay. So, as we move forward here, the expectation would be that, that you're eventually going to – as we get several more quarters under our belt, you're going to catch up to the delta we have here between now and where rig count has gone?

Yeah. The only caveat to that would be, I mean, if you look our revenue change in the quarter, it looked a lot like the rig count movement three to four months earlier. The only caveat to that would be is bottlenecks with fracing. I don't know how that's going to impact completions, because it's already – the DUC count's already growing in the Permian, and that's where most of the activity is. So how and when that gets addressed will affect us, it's impossible to forecast that. The sand demand, I've seen delays in people getting sand, frac crews getting equipment refurbished, issues trying to staff the spreads, so that will be a bottleneck that could affect everybody behind the frac job.

Okay. That's really fair. And then just crew – so a follow-up on the working capital line of questioning from earlier, congrats on the net working capital sales metric. I know you've been looking toward that for a long time. Just – as we think about the recovery, so as Dan talked about the inflection going the other way, is the expectation that you're going to be able to maintain that ratio into improving activity? You talked earlier also about the need to ramp, kind of pre-place some orders in advance, just trying to get a sense for how that cadence plays out as you're trying to stay ahead of the market in a recovery?

I think what we'll see, Sean, is improved turn rates, improved DSOs, but it – certainly, absolute additions to those assets, but we'll turn them faster. And so we expect to be in that 25% working capital range or better given the movement in revenues. But we don't see that number worsening in the coming quarters.

Now we – I would expect – and again, I always talk about your modeling, because you guys have modeling questions for me when you call me, but I do modeling 20%, 25%. I mean, 25%, but we would hope to do better than that, we did 23.5% this quarter. And going ahead, I feel comfortable with saying we'll be in the 20%, 25% range. We won't be back in the 30% like we were before. We've taken some – we've made improvements in processes at all and I'm pretty confident of that, Sean.

Okay, great. That's very helpful. Thanks, guys.

Thank you.

And our final question comes from Walter Liptak from Seaport Global.

Hey, Walt.

Hey, Walt.

Hi, thanks. Good morning, guys. I wanted to ask about pricing in the fourth quarter, are you seeing any product pricing improving yet?

In the fourth quarter?

Yeah, in the fourth quarter.

No, no. Pricing is still pretty flat. I mean, if you take out the mix issue, we are seeing some improvements. But overall, given that pipes now – we're seeing an increasing pipe sale, the overall margins haven't changed much. We do expect that some inflection in the coming months and quarters for sure.

Okay. And the branch level incentive plan that you talked about, is that something new that's related to the new technology? How should we be thinking about that versus may be where you were in the last cycle at this point?

This is a plan that we put in place in the early 2000s timeframe when we broke this business out from under NOV's corporate incentive plan, and it's a branch level plan. And so, they simply make each quarter a larger pool of bonus amount based on how well they push gross margins and how well they manage expenses and how well they grow market share. So it's a pretty powerful plan and it worked well, that's the reason it's been in place for 10 to 15 years. It's produced pretty great results for us over the years. So generally, the better you get your ratios, the more money you get in a quarter.

Okay, that's great. And then, I wanted to ask about pipe supply. I know that you guys have a very diversified pipe supply, are you thinking any different about imports from outside the U.S. now? And we've heard about U.S. pipe mills ramping production. Could this business turn into a good business this time around?

Yeah. I mean, pipe generally – if you take out horrible deflation periods, it's a good business for us. And based on import duties and all sorts of other political scenarios, our purchases ebb and flow from domestic to international to both, and the ratios kind of move. So, if someone were to put another tariff in, I'm sure that would affect where we're getting our pipe, but we have sources for pipe on many, many, many countries. So we'll just – we're pretty fluid at being able to shift those purchases.

Okay. Great. All right. Thank you.

Thank you.

Thanks, Walt.

We have no further questions at this time. I will now turn the call over to Robert Workman, CEO and President, for his closing statements.

I'd like to thank everyone for their interest in DistributionNOW, and we look forward to talking to you in May. Thanks.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.