Good morning and welcome to the Second Quarter Earnings Conference Call. My name is Michelle and I will be your operator for today's conference. 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, Dave Cherechinsky. Sir, you may begin.

Thank you, Michelle, and welcome to the NOW, Inc. second quarter 2018 earnings conference call. We appreciate you joining us this morning and thank you for your interest in NOW, Inc. With me today is Robert Workman, President and Chief Executive Officer of NOW Inc. And 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 conversations this morning. Before we begin this discussion on NOW, Inc.'s financial results for the second quarter of 2018, 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 order 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 as well as supplemental, financial, and operating information may be found within our earnings release on our Investor Relations website at ir.distribution.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, net income or loss excluding other costs, and diluted earnings or 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 earnings release. As of this morning, the Investor Relations section of our website contains the 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 second quarter 2018 Form 10-Q today, and it will also be available on our website. Now, let me turn the call over to Robert.

Thanks, Dave, and good morning. I want to thank each of you for taking the time to join us today. At the midpoint of the year, we were pleased to see the U.S. market continued its positive trend and rig count growth, drilling and completions activity and facility-gathering and transmission infrastructure projects. Our (00:03:28) grows as the customers are realizing the value of our broad range of (00:03:34). Our strengths come from our one to many customer support (00:03:37) where we serve multiple customers from local branches with our core offerings. Additionally, our supply chain solutions deliver value through a one-to-one (00:03:43) where we specialize in managing key portions of our customer supply chain so they can focus on their core business by working alongside their personnel on their premises, sourcing goods and solutions from suppliers, managing their warehouses, minimizing product supply chain costs and risks, reducing their SG&A, and eliminating duplicative capital employed. A couple of value builds further from our bundled offerings where we provide kitted solutions of modular turnkey solutions for rotating equipment, valve actuation and process and production equipment designed to customers' specific applications. We finished the second quarter of 2018 with revenue of $777 million, up $126 million or 19% from the second quarter of 2017. We saw profitability across all three segments, with significant growth in our U.S. operations both sequentially and year-over-year. Our 19% year-over-year revenue growth outpaced advances in global average rig count, which was up 8% during that same period. The U.S. top line increased 25%, and International increased 12% year-over-year, partially offset by Canadian decrease of 5%. And the U.S. Energy Centers made up 57%; U.S Supply Chain Services 29%; and U.S. Process Solutions 14% of second quarter 2018 U.S. revenue. In the second quarter, sales related to midstream activity…

Thanks, Robert. For the second quarter of 2018, we generated $777 million in revenue, up $126 million or 19% from the same period in 2017 and an increase of $13 million or 2% sequentially. This marks the highest revenue level since the first quarter of 2015, the onset of the prolonged downturn. In the quarter, gross margins reached 20.2%, the highest level since the fourth quarter of 2014, up from 19% in the same period of 2017 and up sequentially from 19.4%. This significant jump was driven primarily by pricing gains from pipe, a portion of which is the result of a favorable spread between inventory cost and replacement cost which fueled premium product margins and a boost to gross margins. While we believe there's still room for growth (00:17:03) gross margin gains over time, bending favorably when commodity inflation continues and our market expands further, we expect the gross margin percent to fluctuate in the short term. Warehousing, selling and administrative expenses or (00:17:18) was $139 million. This is the (00:17:20) than in the second quarter of 2016 which then, on a run rate basis, we added 1.1 (00:17:28) (00:17:28) in revenue to our business. In other words about the same level of expense for our business now at $1.1 billion larger annually. We're serious about adapting our footprint to a constantly changing market. Our employees are focused on the customer, growing the business, and improving bottom line results. For some color on the effects of expense rationalization when viewing the locations closed in the last year, the revenue generated in those now-closed locations totaled around $28 million in 2Q 2017 and $3 million in 2Q 2018. Our revenue (00:18:03) $25 million in those discrete locations, while (00:18:07) a portion of this revenue by servicing those (00:18:11) locations, the…

Thanks, Dave. Let's wrap up with the outlook for the second half of 2018. Our outlook is tied to global rig count and drilling and (00:23:20) particularly in North America. Oil prices and U.S. oil storage levels will continue (00:23:28) primary catalysts for determining U.S. rig activity. Our approach continues to be to advance our strategic goals and manage DNOW based on current and projected market conditions. Before I move on to recognize one of our dedicated employees, I'd like to summarize the progress we've made in the execution of our strategy. We're adjusting our footprint in line with customer demand and optimizing our human capital and supplier relationships. We executed on margin enhancement initiatives by improving our quotation and pricing processes, leveraging and optimizing our inventory, and driving intra-company collaboration. We leveraged acquisitions through enhanced cross-selling and we approached capital allocation with discipline, improving inventory turns, and continuing to engage acquisition targets that would help us deliver on our near and long-term objectives. With a further successful execution of our strategy, we fully expect continued improvement towards generating greater shareholder value. With that let me recognize one of our (00:24:28) the employee whose daily hard work and dedication enable us to deliver on our promises. Mary Gilles (00:24:33) began her career with Wilson Supply in 1974 as a clerk and warehouse operations in what most Wilson employees call the White House, a building that was painted white before a newer house was built in the 1980s on Conti Street close to Downtown Houston. Mary subsequently moved through roles in purchasing credit and billings. Today, Mary manages mill test reports or, as many refer to them, (00:24:56) for DNOW's customers. The management of (00:24:59) a job that has grown exponentially as more and more customers want (00:25:03) of the materials they're buying. Mary is always asking people how they're doing and how their family is doing. She regularly walks laps around our 450,000-square foot La Porte distribution center at 7:00 AM each morning before her day starts. People who know Mary know her as a very caring person who frequently brings people gifts for no reason other than her kindness. She has remained steady and loyal over (00:25:27) through the many ownership changes from Wilson Supply to (00:25:30) to Schlumberger to NOV and ultimately to DNOW. Over the past 44 years of service, there hasn't been anyone (00:25:36) supportive of all the changes we've endured than Mary. Thanks for all you do for DNOW, Mary. Now, we turn it over to Michelle, so we can start taking your questions.

Thank you, sir. And the first question in the queue, sir, comes from Walter Liptak with Seaport Global. Your line is open.

Hey, Walt.

Hi. Thanks. Good morning, guys. Hi. Good morning. Congratulations.

Thank you.

So, yeah, a lot of good things going on. But I wanted to start off with one of the comments that, I think, Dave made about the gross margin in the second half, and I think you've mentioned that the gross margin is going to be a little bit lower. Did I hear that right? And maybe just a little bit of color around why that might be the case.

Yeah. I think what we're alluding to there, Walt, is gross margins were very strong in the second quarter due to many things. We're pushing price. You've got commodity inflation. There's product availability issues. But one component of the gains we saw in the second quarter was simply the difference in our inventory costs versus replacement costs as market prices change. That gap we believe will continue to narrow and these, what we call, premium margins will ease a little bit. So, (00:27:23) gross margins, and we've talked about this on the last (00:27:27). We're focused on pursuing higher margin transactions, and we're using technology to help us (00:27:35) incrementally higher price on the next transaction. Plus we're still seeing general inflation and commodity (00:27:42) forward. So, that premium piece, we believe, will (00:27:47) a little bit, so...

Okay.

So we expect some movement up and down with gross margins. And after a big jump like this, we think it might ease a little bit in the short term, but bend favorably over time.

Okay. All right. Fair enough. Let me ask you a question about the high producing basin like the Permian. Are you continuing to see better pricing there or is that – as the takeaway capacity gets constrained, is pricing getting more difficult in the Permian?

(00:28:22) we're seeing broad price appreciation across the world (00:28:29) product lines, and I assume we're seeing the same (00:28:32) Permian. So I think that – whether that's going to continue is another matter. Takeaway capacity issues and activity in the Permian can alter that. I would tell you the Permian is probably our most competitive play in the world, and pricing is obviously a big part of the decision for each transaction our customers make. So that's just a battle we have to fight. But we don't – I think we expect the activity there to stay strong and (00:29:04) for a migration of sorts to happen to the other plays. (00:29:08) going to be puts and takes on gross margin and (00:29:12) and, more importantly, on the (00:29:16) customers as activity strengthens.

Okay. All right. That sounds great. Just another one on the reallocation of resources; really impressive with the example that you gave of the $27 million of closed operations down to $3 million. So, the question is, with the reallocation, when do we start seeing benefits? How do the benefits of that reallocation show up? I guess is it people and inventory that you're investing in and does that show up in growth rate or margins? How do we gauge the benefits from the reallocation of resources?

Yeah. That's a good question, Walt. I mean, I think we're seeing the benefits. If you look at the flow-throughs, gross margin flow-throughs, operating margin flow-throughs that we've demonstrated each quarter, we're seeing the benefits of finding locations where the contribution margin for each customer or transaction is better than the last transaction. That's why we're moving out of some locations, shrinking the size of some locations, and that's showing up in our flow-throughs, in our cost, to service those customers. I mean, our WSA, the expense as a percent of revenue has dropped eight quarters in a row. We expect that percentage to continue to improve as we grow the business. So, I think its showing up and I think it's – I think what we were trying to say is, we have foregone some revenues to improve the return on investment our shareholders have in DNOW and it's paying off.

Okay. That sounds great. All right. Congratulations again. Thanks, guys.

Thanks, Walt.

Thank you. And the next question in the queue comes from Steve Barger with KeyBanc Capital Markets.

Hey, Steve.

Hi. Good morning, guys. Good morning.

Hi, Steve.

You said tight pipeline capacity could maybe shift capital to other basins. Can you talk about where you are in terms of customer relationships and acceptance in those basins, just in terms of keeping a momentum in the tank battery business?

Yeah. So, so far, we have not seen anything occur in the Permian outside of rumors about – that you hear from everybody, I think on almost every earnings release so far this season. But our activity is still strong. Now we get the benefit of the fact that, in our Supply Chain Services (00:31:49), we are embedded with four of the (00:31:52) three largest operators in the Permian. And so we have to plan (00:31:57) department. We plan with their project management teams around materials. So we get an early indication if they're shifting capital to other basins, and we're not seeing that either. So, I'm not saying it's not going to happen, but so far, there's been no indication of it. But I do believe that that our operator customers, whether they're the supply chain (00:32:15) customer or just our regular general branch customers, (00:32:20) cut back on CapEx in the Permian and then (00:32:23) somewhere else because they still have commitments they have to make to their shareholders. So, (00:32:28) we fully expect, if we do see some slowdown in the Permian, which, again, we've not seen any indication of yet, that you would see capital shift to the Eagle Ford, to the SCOOP/STACK, to the DJ and Niobrara Basin. And what do you know, we're in all those places, too. So, I'm not expecting any top line hit to our business in the U.S.; it just may shift from one basin to another.

And in terms of the modular tank battery business specifically, how was the acceptance of that going? You gave us an update last quarter about being able to sell some specific parts of units. Any update there?

Yeah. I was just up there a couple of weeks ago, and if you've been there two years ago to the facility up in Casper and you walk through all those (00:33:17) those buildings, through all those (00:33:18) fabricated, you would have seen most (00:33:22) the majority of those skids with either (00:33:26) buildings on them because they were going to Rockies and so you have to protect it from the weather. I was up there last week, and I had a hard time finding skids with buildings on them. So, that means they're all headed south. So we're having (00:33:39) really, really good success in the SCOOP/STACK Permian and Eagle (00:33:43) from that operating – and I expect that to continue.

That's great. One more for me. And really great to hear that you're being selective on finding those higher margin transactions. When you talk about technology driving that process, is that the quoting system that you're referring to? And does that contribute to just margin through price or does it help with share gains as well?

Well, we're using different technologies for both of those, okay? So, we have some technology we've implemented here recently around – lots of times in this business, especially when it's busy like it is, first hold back wins. I mean, our customers are just trying to get the inquiry off their desk and move on. So there's an advantage to getting the quote back to the customer quickly. So, that's helping. The system we've got now that helps us fill out most of the quote upfront and then we just handle the one-off items later. And on top of that, we implemented some technology in our SAP system about a year and a half ago, I think. So that's per branch, whether you're in Williston, North Dakota or you're in Casper, Wyoming or you're in Washington, Pennsylvania or Cuero, Texas. It looks at your region and it looks at the stuff that you've quoted for projects and looks at the prices you've been able to win orders at and suggests what the price should be, not only based on your highest margin transactions previously, but also inputs that we've put in the system here at our corporate office that update from the price of steel to suggest what the replacement cost is going to be, so you don't quote based on your moving average cost. You quote based on replacement cost. So all of that is helping.

And it's always hard to tell about share in an up cycle, but do you feel like you're able to take some share from the smaller guys in those various regions?

Yeah. No doubt about it. I mean, any metric that you want to come up (00:35:37) against it. There's no other explanation.

All right. Great job. Thanks for the time.

Thank you.

Thank you. The next question in the queue comes from Adam Farley with Stifel. Your line is open. Adam Michael Farley - Stifel, Nicolaus & Co., Inc.: Hey. Good morning. Thanks for taking my questions.

No problem. Adam Michael Farley - Stifel, Nicolaus & Co., Inc.: Yeah. First question is on tariffs. You guys don't seem to have any problem with passing price right now. When do you think tariffs will become an issue? And then also on sourcing, I know you have a lot of relationships with domestic suppliers. But do you see any impact right now? Are you guys pre-buying any inventory to get ahead of this? Just any color there.

Adam, I think what we're seeing is – there's a lot of tariff activity going on. And the U.S. manufacturers are matching those tariffs. I think U.S. manufacturers are smartly taking advantage of that. They're raising their prices. So that inflation is happening. So whether tariff news changes in the coming months, we don't see it affecting us much different in terms of the imports except for a less need (00:36:49) of product availability. So there are (00:36:49) which limit Korean imports and things like that. But we see it (00:36:53) that being favorable. We, as far as inventory (00:36:58) buying, we're trying to make sure we have the right inventory through the cycle. And our turns are still (00:37:06). It could be a little higher. So we still have extra inventory to accommodate the build in the short term. What you don't want to be stuck with is some of these tariffs being relieved and imports coming back in and then you're left with a situation where your inventories are (00:37:26). So, we'll just try to manage that tightly. Adam Michael Farley - Stifel, Nicolaus & Co., Inc.: Okay. That's really helpful. And then just shifting gears to offshore upstream. The presentation called out some signs of increasing activity in Norway. But at the same time, you also had mentioned offshore drought. I know it's been a challenge for a very long time. Just any additional color there. What do you think will get that kind of moving? Is that just higher oil prices, tender capacity onshore? Just anything there will be helpful.

Yeah. I don't think (00:38:00) question about the fact that an offshore (00:38:03) recovery is coming. You can't cut your expenditures each year from – down by $500 billion to $750 billion on offshore, which is a third of the world's (00:38:14) and think that that's not going to impact (00:38:18) storage and production negatively, which it already is, by the way. It's already turned the corner. So, the issue (00:38:25) the fact that it can take a little while once it comes back to affect our operations because the offshore industry has scrapped, what, 150 offshore rigs or something of that nature? I don't know the exact number but its way up there. All that inventory ends up in a shore base and that inventory in the shore base supplies the existing fleet. So, it's really hit our offshore revenue stream considerably. So, I'm not counting on revenue recovery in the offshore sector for us in any meaningful way until late 2019, early 2020. Now, the good news is we've reallocated our resources towards all of our land opportunities, and we're seeing growth every single quarter. It's nothing massive, but it's keeping the business in a profitable sphere so that we can hold on to our infrastructure in places like (00:39:12) in Singapore, in Aberdeen and Stavanger, places that where offshore is supported so that when (00:39:19) does come back, we should have some infrastructure and (00:39:26) in place to attack that market without much incremental investment. Adam Michael Farley - Stifel, Nicolaus & Co., Inc.: Seems like a pretty good strategy. Thanks again.

You're welcome.

Thank you, and the next question in the queue comes from David Manthey with Baird.

Hi, Dave. David J. Manthey - Robert W. Baird & Co., Inc.: Hi, guys. Good morning.

Hi, Dave. David J. Manthey - Robert W. Baird & Co., Inc.: First question for you, Dave, can you disaggregate the factors that drove the gross margin change? You talked about the price cost inventory situation. But can you then talk about any other factors there, mix or price increases, other volume benefits?

Yeah. In terms of mix, our product line that grew the most as a percent of revenue was pipe. So we're seeing product inflation there and a bigger volume with tonnage of pipe being moved as well. So that had a heavy weight on the growth in terms of gross margin percent sequentially. So that was a big driver of it. But all the things we talk about from using technology to find the right incrementally higher strike price, to seeking higher margin transactions, walking away from the 2%, 3%, 4% PVC line pipe transactions, all of that conspires to get the kind of gross margin gains we saw. But a third to half of the gains were probably due to pipe. So the pipe inflation, generally, is helping us grow gross margin (00:40:58). We do expect some volatility like we talked about. David J. Manthey - Robert W. Baird & Co., Inc.: Okay. So the difference between the cost of your inventory and the market price, that factor alone, did you say that was maybe a third to a half of the year-to-year improvement?

It's hard to tell. I mean, I believe it was – could have been a third. It's hard to calculate because, in an inflationary environment, there's always going to be that spread as prices edge up. So just measuring that spread is harder to do, but it could have been a third, but it's hard to say. David J. Manthey - Robert W. Baird & Co., Inc.: Okay. All right. And then, as it relates to longer term trends, when you look at the current mix of business and growth trends, do you feel that gross margin can sustainably exceed prior peak levels over the long term?

I think as long as we're in a strong global economy like we're in and we see general inflation, commodity inflation and our market growing, I think gross margins can continue to go up with kind of a stair-step approach. They will moderate.

And Dave, I would just add to that. Don't forget that in this down (00:42:21) on the 12 acquisitions we've made, some of those have historically higher gross margins than the rest of our business (00:42:29) grow. That's also going to pull gross margins up. David J. Manthey - Robert W. Baird & Co., Inc.: Makes sense. Thank you very much.

Welcome.

Thank you, and the next question in the queue comes from Ryan with Northcoast Research.

Hey, Ryan.

Hey, guys. Good morning.

Good morning.

I just wanted to quickly ask you guys about the dynamic on the price cost side of things, Dave, as it relates to that benefit. Assuming that we continue to see the type of inflation we're seeing on steel and pipe, I mean, the expectation should be that that dynamic could continue in the back half. I understand maybe being a little bit cagey with regard to how that might play out. But if we continue to see that inflation, we should expect that dynamic to continue to be a benefit for you guys, correct?

Well, as long as we see commodity inflation, I think we'll be able to realize improvement to profit margins generally. But you have to keep in mind we just went through a long downturn. Our pipe, in particular, was written down in lockstep with the movement in commodity prices, so we're burning off that inventory. (00:43:41) it's gone, that premium we talked about, that's going to diminish. So we'll still benefit from commodity inflation. But that inventory cost (00:43:52) cost differential will narrow and that will be a headwind to gross margins.

Okay. Right. So then, if a third to a half is from pipe inflation, think about the other components, you guys had talked about the improved quoting, the procedures and functions there, is that something that you still feel like is in the early innings or is that something that you expect to continue to have some incremental benefit as the rest of the year plays out?

No. Our operations are incented to push margins. It increases their take-home pay every quarter. So, I fully expect that to continue indefinitely on pushing price. Now, we've come from a low of the 16% gross margin range to now at a level that's similar to 2014 level. But I don't believe that we're finished. I mean, I believe there's more margin (00:44:49) more margin percent to be gained both in the local business, the branches and supply chain, as well as in our (00:44:54) solutions group where margins are definitely healthy and accretive to gross margin percent in the rest of the business.

Okay. Great. And then my last question on Process Solutions, really nice growth there this quarter. Maybe just if you could dissect that a little bit in terms of how much of that are you starting to see with the traction at TSI and the modular tank solutions coming through, or is a lot of that still sort of in the pipeline and could benefit the growth rate even more here going forward? Thanks.

Yeah. So it's not just the Power Service acquisition, Odessa Pumps is hitting on all cylinders right now as well. Their core area for Odessa Pumps is the Permian and the Eagle Ford and SCOOP/STACK Mid-Continent, so you can imagine how busy they are right now fabricating water injection pump skids, water transfer skids, all sorts of fluid rotating equipment packages, as well as (00:45:57) Odessa Pumps in those areas that are now pulling (00:46:00) offerings from Power Service down into the (00:46:03). And so all that coupled together is generating quite a bit of (00:46:08) success as far as penetration into new basins.

Michelle?

Okay. And the next question in the queue comes from Sean Meakim with JPMorgan.

Hey, Sean.

Hi, Sean.

Good morning. So could you maybe just give us a little more sense of the revenue contribution from midstream? Historically, it's been on the smaller side. And within that, just trying to think about what the product mix in midstream looks like compared to the overall, just trying to better size that opportunity.

Well, our midstream market continues to grow, especially as we're expanding our valve and valve actuation capacity. Originally, not too long ago, two, three years ago, we had one valve actuation instrumentation shop. Now we have, just in the U.S. alone, we have at least four or five of them. We have them up in Canada. We've got them in Singapore. You've seen the one in the Middle East. So we're investing heavily in our midstream product lines, especially the higher-value product line, which is valves, valve actuation, and so forth. So, we (00:47:22) midstream based on pure midstream customers, (00:47:27) you do. You can pull a report on SAP. It'll show you much we sold to Kinder Morgan (00:47:30) transfer or whoever you want to pull up. We don't (00:47:32) the other part of midstream which is when you say Chesapeake or Chevron or somebody is going to do a gas gathering system, well, it's built with the same account that we build to when they build the tank battery. So we only measure the pure tank trunk lines that go between plays. We don't keep up with – we really see no benefit in putting a lot of effort in SG&A and time and money into trying to measure how much goes into a gathering line in the middle of the Permian Basin field. So, our midstream market is strong for us. It's always been important to our business. We've been in the midstream market since I started here in 1991, and it was a big part of Wilson Supply's business. So, it's strong. It's growing. We're doing well in Canada in that market as well.

Okay. Fair enough. So thinking about the leverage off of WS&A, do you think by 2019 you can get back to where that's 13 % to 15% of sales? Just thinking about some of the puts and takes there around hiring difficulty, wage inflation on the one side, but then also additional cost-cutting measures and of course the push on gross margin which has been a big part of the discussion today. Just curious how you think about that, what that can look like on WS&A as a percentage of sales next year.

Yeah. I think 13% to 15%, so we ultimately want to get (00:48:52) range and lower. That's going to be a function of (00:48:58). It's hard to gauge what's going to happen in 2017. We haven't really spent too much time thinking about revenues and gross margins and cost of service to business, but that's where we (00:49:08). We want a business that's agile, that's scalable (00:49:12) market that grows or shrinks, and we know that's kind of why we need (00:49:15) to be, but we don't have a number or a guess for what 2019 would look like.

Okay. The long term, that's where you see things and just where you optimality like the business to be?

That's right, that' right.

Okay. Thanks a lot.

Thanks, Sean.

Ladies and gentlemen, we've reached the end of our time for the question-and-answer session. I would now turn the call over to Robert Workman, CEO and President for closing statements.

(00:49:47) everyone for your interest in DistributionNOW and we look forward to (00:49:51) about our 3Q results in a few months. (00:49:53).

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