Welcome to the Third Quarter 2017 Earnings Conference Call. My name is Paulette 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 Chief Accounting Officer, Dave Cherechinsky. You may begin.

Thank you, Paulette, and welcome, everyone, to the NOW, Inc. third quarter 2017 earnings conference call. We appreciate you joining us this morning, and thank you for your interest in NOW, Inc. With me today are Robert Workman, President and Chief Executive Officer of NOW, Inc.; and Dan Molinaro, Senior Vice President and Chief Financial 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 during our conversation this morning. Before we begin this discussion on NOW, Inc's financial results for the third quarter ended September 30, 2017, 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 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, 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 U.S. GAAP, you'll note that we also disclosed various non-GAAP financial measures, including EBITDA excluding other costs, net loss excluding other costs, and diluted loss per share excluding other costs. Each excludes the impact of certain other costs and, therefore, has not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our press release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the quarter. A replay of today's call will be available on the site for the next 30 days. We plan to file our third quarter 2017 Form 10-Q today and it will also be available on our website. Later on this call, Dan will discuss our financial performance and we will then answer your questions. But first, let me turn the call over to Robert.

Thanks, Dave. Before we get started today, I'd like to take a moment to think our long-term leader, mentor and, more importantly, our friend for the 21 years of guidance he has provided to DistributionNOW. Pete Miller made an immeasurable positive impact not only on our company but more significantly on the lives and careers of the entire DistributionNOW family. It is hard for me to envision the halls of our offices without Pete, especially since I've worked directly for him for the last 16 years. One thing is for sure, I don't think Pete realizes that he has retired because I met up with him recently one afternoon and had you been a patron of the restaurant that day you'd realize there hasn't been any change to our mentoring relationship. While he is no longer Executive Chairman, I look forward to continue our long-standing relationship and seeking his counsel. We all love and miss you, Pete, already, and we hope you enjoy your well-earned and deserved time in Telluride with Peggy. Before I get back to the DNOW results, I'd like to extend our thoughts and prayers to all those who were impacted by the recent natural disasters, including hurricanes and the California fires. As our DNOW DNA to help others in times of needs, and I want to thank DNOW's resilient employees who responded to our customers, employees, and community needs in time of crisis. Despite being based in Houston with nearly two dozen facilities in the areas affected by Hurricane Harvey, our facility sustained minimal damage. Regrettably, many members of the DNOW family were impacted and are still displaced from their damaged homes. The countless acts of heroism and selflessness, such as using personal boats in rescue operations, were very inspirational. Moving back to DNOW, for the…

Thanks, Robert. We are approaching a return to profitability and it wouldn't be possible without our dedicated workforce, and I remain convinced that we have the top people in the industry. I am proud to be part of this wonderful team and I'm grateful for the hard work, integrity and perseverance of the DNOW family. Thanks for all you do. We will continue to concentrate on the needs of our customers while focusing on producing long-term value for our stakeholders. Robert discussed our business and I'll say more about our financials. NOW, Inc. reported a net loss of $9 million or $0.08 per fully diluted share on a U.S. GAAP basis for the third quarter of 2017 on $697 million in revenue. This compares with a net loss of $17 million or $0.16 per fully diluted share on $651 million of revenue in the second quarter of 2017. When looking at the year-ago quarter, we had a net loss of $56 million or $0.53 per fully diluted share on revenue of $520 million for the third quarter of 2016. The third quarter 2017 results include $5 million of after-tax charges for valuation allowances recorded against our deferred tax assets and less than $1 million of pre-tax severance charges. After adjusting for these other costs, our third quarter loss was $3 million or $0.03 cents per share, both non-GAAP measures. We are encouraged by gross margin rising to 19.4% in 3Q compared with 19.0% in 2Q 2017 and compared with 16.7% in the year-ago quarter. The company generated an operating loss of $6 million in the third quarter of this year versus a $14 million loss in the previous quarter and an operating loss of $53 million in the year-ago quarter. Third quarter EBITDA excluding other costs, in non-GAAP measure, was…

Thank you. We will now begin the question-and-answer session. And our first question comes from Matt Duncan from Stephens. Please go ahead.

Hey. Good morning, everybody.

How are you?

Hey, Matt.

Good. So first question, and, Robert, you alluded to Harvey, but I don't know that I heard sort of a clear impact. Was it a net negative or a net positive? And if so, sort of how much?

Well, it would be a net negative and it's going to be a few million dollars in just revenue for us, but it's almost impossible to calculate how our customers were impacted from the hurricane and how that affected their purchases from us. So I really can't quantify it.

Okay. And then you talked a lot about sort of the puts and takes looking at the sequential move in sales, 3Q to 4Q. I know, typically, it would be down sequentially from a seasonal standpoint. But also sounds like you've kind of gotten rid of the bottleneck at Process Solutions and if completions do go up, you would think we'll see some improvement in your tank battery revenue. So all things considered, what's the most reasonable way to think about the sequential change in your sales here?

Well, it's really going to boil down to the areas that should improve slightly in the quarter, like our U.S. SCS with Marathon in Carlsbad, like you mentioned, our Process Solutions sales, Canada and international, if they're going to be able to offset or at least soften. The seasonal climate, we will absolutely experience in our biggest business, which is our Energy Center business. So the vast majority of the time, 80%, 90% of the time, even in a growing market, Q4 seasonality is impossible to overcome. So I'm looking at a flattish quarter at best.

Okay. All right. That helps. And then last thing for me, it sounds like you guys are sort of running a beta test on a way to improve profitability further. And we look at what's going on with rig count. It's started to trend a little bit lower. But now we've got oil prices moving higher, so maybe that reverses. But who knows. So, let's assume sort of flattish revenue and, obviously, we both know it won't turn out that way. But what I'm getting at is what are you guys doing to drive profitability higher? It was very nice to see the return to EBITDA positive this quarter. I know that's a focus for the company. How much do you think you can drive EBITDA up? If we assume sort of a flat revenue environment, how much room is there to continue taking cost out and improve profitability of the company over the long term?

Well, it's not going to be just taking cost out. We have several regions that are not booming like the Permian or the Niobrara or the Marcellus or the Bakken. And so in those areas, we're attempting to pilot a redesign of our fulfillment model which would take cost out. So, we've done that already. We're just measuring right now to see if it affected revenue, how it affected expenses. And so that's something that if successful, we could take to many other regions that are not experiencing the recovery. Our branches, based on their incentive plan, each quarter continue to push price. You've seen it three quarters in a row now, so that's another avenue to improve profitability in a flat market. And then, lastly, like you mentioned, our Process Solutions Group, which is – so that's the pumps and power service combined, have typically better margins. So as they're successful in penetrating markets where they've historically not participated, those additional incremental share gains, that better-than-average margins will improve EBITDA.

Got it. All right. I appreciate it. Thanks, guys.

Thanks, Matt.

And our next question comes from Andrew Buscaglia from Credit Suisse. Please go ahead.

Hey, Andrew. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Hey, guys. Thanks for taking my question.

No problem. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Yeah. You talked about it, I think you mentioned in the call – I mean in the past couple of calls sort of an interesting backlog, building and a lot of potential projects or potential work coming online especially in 2018. So can you talk us through just kind of a high level, I mean I would think the way you guys are managing costs as some of these things really pick up. How you expect those incrementals to flow through in 2018 in any sort of like unusual ramps quarter-to-quarter?

Yeah. For the longest time in this business, I've been in this business now for 27 years. We usually experience 10% to 15% incremental – decremental to EBITDA based on revenue changes. So far in this recovery, we have 15% in Q3 which was higher – which is the top end of our normal experience, but on average it's over 20% so far. So, I still live in a space of I like being surprised if they're better than our experience says. So, we internally expect 10% to 15% and just get excited when it goes beyond that. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Okay. Okay. So, I mean we should probably just use history as our base case for now and then be surprised, I guess?

Yeah. I would suggest that and the reason I say that is we all expected gross margins to improve as the market strengthen. But... Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Yeah.

...nobody in this room on this end of the call expected it to do what it's done so far. So, that is a total surprise. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Okay. Fair enough. Okay, and then I'm just curious on the comment on the private equity conversations you guys have had. Can you give us a little more color on that because that's been interesting and something that's been a little bit quiet as of late?

Yeah. There are several companies out there that have a component of their business that are interesting to us, but have other components that we're not interested in. And so we've never been successful in convincing those firms to talk about a partial acquisition. And as of late, those conversations are a little more successful than they have been in the past, and that's generally what I'm talking about. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC: Okay. Okay. All right. That's it for me. Thanks, guys.

Thanks, Andrew.

Our next question comes from Steve Barger from KeyBanc Capital. Please go ahead.

Hey, Steve.

Good morning, guys. This is Ryan on for Steve.

Okay.

Yeah. I just wanted to talk about oil price has been improving slightly. I mean, does that change your thought on rig count and DUC completions going forward at all?

Well, I look at rig count and oil prices separate from the completion piece. My personal belief, and I'm telling you I will be wrong because no one ever forecast this stuff right, but I think we're going to be range-bound in rig count and oil prices until offshore declines start meaningfully happening. Because we underspent offshore development by trillions probably in 2015, 2016 and 2017, and these are all three- to five-year project. So, the resilience of offshore production that we've seen through this downturn was really projects started in 2012, 2013 and 2014. But those projects didn't happen, the three years post that period. And so that's eventually going to turn into offshore declines. And then when offshore declines happen, then you're going to see an imbalance in supply and demand. And then I think the Shell participants will just take advantage of improved oil price while the large integrated oil, the Shells and the Totals and the Chevrons, and the rest scramble to start FID studies and try to get offshore production back underway, and that takes three to five years. So my belief is that when offshore decline start, we're going to have a good three- to five-year run of nice oil prices that will drive a lot of land activity while offshore players scramble to try to solve the problem.

Okay. And then...

Now, regarding completions, we've had a lot of oil companies that have released their earnings in the last three weeks. And at this 50 to 60 range, they all comment about how they want to get their docks completed. And their biggest issue is not a desire or willingness, it's getting the crews and getting the equipment. So if they follow through on those comments, then you would see a nice impact to our U.S. business even if rig count stays range-bound for a little while.

Okay. And then could you talk about the customer traction you're getting as you bring the modular tank battery offering into new basins? And can you maybe talk about which basins you're seeing the most improvement in?

Yeah. We're seeing some exciting things with respect to penetrating that market, but we might have gone from having our toe in the water to having one ankle in the water. So, it's exciting to see it happening because it never happened before but there's a tremendous amount of runway left on growing that business in other basins. We signed a deal for just recently for South Texas for most of the equipment that would go into tank battery that last through 2020 with a large operator. So those kinds of things are exciting. We're selling a bunch of gas measurement and LACT units into the Delaware and the Midland Basin we've never sold before. That's exciting. So we're seeing fruits of the labor, but we have – we're nowhere near declaring victory in that area.

Good color. And then my last question just going back to gross margins, real nice performance there. Can you maybe talk about any internal initiatives you guys are taking to drive that performance?

It really – it has happened in a couple of areas. One is our incentive plan drives it. The branches are rewarded at the branch level, not across the corporation, but at their specific branch based on EBITDA margins. And EBITDA margins, one of the easiest way to improve them is to push pricing. So, that's producing some of the result you're seeing. And then the acquisitions we've made are typically higher margin businesses. And so as they grow, then margin percent so goes with it. And then you already mentioned earlier we're doing some beta test that could impact in a positive way WSA (41:57) expenses and that would also help.

Great. Thanks, guys.

Thank you.

Our next question comes from Joe Gibney from Capital One. Please go ahead.

Thanks. Good morning. Just a question on supply chain. So, how did your upstream portion of that Supply Chain business trend quarter-over-quarter? I think last quarter you indicated it was up over 20%. Do we see similar good result this quarter as well? I know the industrial downstream piece dragged. I was just trying to get a sense of how the U.S. upstream piece of that Supply Chain business worked.

Yeah. It grew simply because we're still implementing new customers, so it definitely outgrew activity. But I don't think it was 20%. I'm thinking probably high teens in that particular segment.

Okay. That's helpful. And then just the people gap, Robert, you referenced it, human capital bottlenecks, and I'm curious from two perspectives. One, it sounds like you corrected some of it in the process and those project management, maybe ASME welders. It sounds like you corrected some of that. But obviously, in the Permian, it's an issue across the board not just for you guys. Just kind of curious what you're trying to do to address that and where the skill gaps are specifically as it pertains to DNOW in the Permian that you're trying to fill and are having a hard time closing the gap on. I appreciate it.

Yeah. I'm from Crane, which is 30 miles south of Odessa and I think it's the best place on earth. I don't know why people don't want to move there. So, we're obviously – it's any position that would go into our branches that we're having issues with, especially the skilled position. So it's not the drivers and it's not the folks that you could find available. It's people that actually know product that understand how to use ERP systems and that things of that nature. So, we're having job fairs in other areas trying to recruit people in. We're using incentives to -moving incentives to get them to move to the Permian. We are holding training for other employees that want to expand their skill set and then move them into that areas. We're trying everything we can possibly come up with to increase our talent in the Permian just to keep up with the demand with respect to the activity.

Okay. Fair enough. As it pertains to process – or excuse me, in terms of the people gap, ASME, welder side, project management side, do you feel like a lot of those issues that sort of (44:19) seem to have corrected a little bit?

Yeah. We've made a lot of progress there, and I would say we've corrected substantially all of that issue. Now, we're just working through the delays that that lacking those positions caused and trying to get those through the system so that we can – we have our shop floors are full right now because for this reason. So we're trying to get those projects out the door so we can start taking on more work.

Okay. Appreciate the color. Thanks.

Thank you.

Our next question comes from Sean Meakim from JPMorgan. Please go ahead.

Hey, Sean.

Thanks. Good morning.

Hey, Sean. Good morning.

So maybe to stay in the Permian a little bit, just curious if you got any line of sight to more penetration for the full prefab units in the Permian. You highlighted I think just now maybe some customer wins or maybe some discrete products, but how about kind of full-power service offering? How is that uptake looking in the Permian?

It's starting to take hold. I had like a little internal challenge between the three U.S. businesses, U.S. Process, U.S. SCS and U.S. Power – SCS and Process Solutions and Energy Centers around who is going to be successful first. And the group that I thought had the least chance of winning the internal challenge won and it was the Energy Centers. So, they got our first customer to accept in a full turnkey headed out to the Midland Basin. And we've had customers as recently as today that have toured that stuff and then they're now in Casper meeting with engineers because they're interested in testing the model as well. So, we're starting to see some traction.

And I guess what would you point to as the – is it the people bottleneck? Is it just the sales cycle? Is it the mix of, on average, fewer high-well pads in the Permian than where the business came from originally? Anything you'd kind of point to you'd say here's some of the initial hurdles that maybe had led to a longer sales cycle than maybe what you anticipated when we first entered the Permian?

Well, it's adoption. It's an adoption challenge, just like our Supply Chain Services business is hard for people to adopt to because it's completely a different way of doing things. So, you have – there's a lot of people involved at an operator's office when it comes to determining and acquiring and designing the tank battery. And if you remember back in the day, if you followed NOV when they were trying to turnkey the drillship, that was a hard adoption sell because customers liked buying from 32 vendors, designing the topside for drillship themselves, didn't want to give up control, they'd done it that way for 30 years. That kind of thing is what we're facing up against. And so, where we've really been successful is when our contacts in, say, the Bakken, where we've – where they penetrated that market over time are getting transferred to the Permian and they're going into these customers' offices going, you guys need to really consider this, here's all the benefits from it. So that's kind of where we're getting our most juice right now is actually customers selling it to their own internal office.

Got it. Okay. Thank you for that, and that all make sense. Just on the quarter itself, you guys called out downstream as being weaker in the U.S. I think I was a little surprised by that. I think we would have thought that your customers in that part of the market would be more inclined to get more work done if they had some capacity offline. And if you could give us a little more detail on what drove that relative to your expectations.

Yes. So, on our last call, we said we might reach $700 million in the quarter and we almost – it was only $3 million short of it. And the reason that we thought even 90 days ago it'd be around $700 million of rev was simply because the original plans for the completion companies was to get most of their spreads out in Q2 and Q3 and that just keep getting delayed either because they had to wait on long lead time items to refurb the equipment or they were having real issue hiring qualified crews to run that equipment. And when that started showing up in their notes and their comments and their calls, we started reassessing how fast this activity with the completions and the DUCs was actually going to impact our revenue. So, that's why we readjusted in Q2, 90 days ago about what we expected for Q3.

On the downstream side though, just curious what drove some of the weakness in the quarter.

I'm sorry, I thought you were talking about the U.S. in general. So, the downstream piece was softer in Q3 than Q2, and that's mainly because finally for the first time ever for us, for our customers, we had a good turnaround season in Q2.

Got it. So more just a tough comp on the prior quarter.

Right.

Okay. Fair enough. Yes. Thanks, Robert.

So we've been talking about turnarounds. Turnarounds are coming, we've been saying that for, what, three years now, and it finally showed up in Q1 and Q2 of this year.

Okay. Fair enough. Yeah. I appreciate that. Thanks.

Thank you.

Our next question comes from Vaibhav Vaishnav from Cowen and Company. Please go ahead.

Hey, Vaib. Vaibhav Vaishnav - Cowen & Co. LLC: Hey, good morning. M&A, if we think about M&A, last quarter you guys had mentioned doing a deal with manufacturers or service companies, doing some kind of swap. Can you provide some color and any progress on that front?

Yeah. So, like with any acquisitions, or at least of all the ones I experienced at my prior life at NOV, you buy a company and you get four, five or six businesses in that company and three or four of them are what you really wanted and one or two of them is not. So, we have some suppliers that we trade with heavily that have made some acquisitions in the past 12 or 24 or 36 months where they acquired something that aren't core to what they do. And so, there's been conversations around whether or not they would want to peel that off and give that – and have us acquire or give that to us to take that over. So, that's what I meant. I didn't describe it very good on the last call. So, we learned that lesson. And we also have in Distribution some things that we've gotten through acquisitions even prior to being DNOW, when we were at NOV that really don't fit what you would normally expect to see from us. They aren't big. Their performance wouldn't move the needle, but they're things that our suppliers are interested in. So that's really what I was talking about. Vaibhav Vaishnav - Cowen & Co. LLC: Got it, got it. And I apologize for asking this question, but I get this question asked almost all the time now. On the market share, how do you guys track market share and are you losing any market share you see? Or anything that you can provide any color around that, that would be great.

There's no doubt that we're gaining share. That's a definite. I could give you 12 examples of that. It's hard to measure how much of the market we get because there's only two big players in the public space that do this, but there are a bunch of independent private people who don't report their revenue externally. And some of those are hundreds and hundreds of millions of dollars of revenue. So it's really almost impossible to get a good picture of what the total market is. We end up using third parties who just put out what they think the market is and we know that's not true. But I mean, it's really – it's almost impossible to measure because there's only – as opposed to other industries where you have 10 or 12 public companies that make up most of the market, here you've got two that make up half the market or whatever the number is and we can't measure the rest. Vaibhav Vaishnav - Cowen & Co. LLC: Okay. Okay. And one last question, if I may. You mentioned delayed line pipe revenues in the press release. Could you talk about like how much is that and if that would be realized in 4Q?

It's part of that $10 million that I mentioned on the call and it's probably – it probably shares a quarter of that amount. And the problem with that is that will get shipped in Q4, but then things that are supposed to ship in Q4 getting pushed to Q1 for the same reason. So it's just everything's getting delayed because of these coaters have to coat all this pipe and they were shut down. So everything got pushed. Vaibhav Vaishnav - Cowen & Co. LLC: Got it. All right, that's all I had. Thank you for taking my questions.

No problem. Thanks.

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

I'd like to thank everyone for their interest in DistributionNOW. We look forward to seeing investors at the Baird's Conference in Chicago, Stephens' Conference in New York, December, NDR with Evercore ISI, and as well as other upcoming conferences and NDRs throughout the remainder of the quarter. Thank you.

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