Welcome to the second quarter 2019 earnings conference call. My name is Sylvia and I'll 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. [Operator Instructions] I will now turn the call over to Senior Vice President and Chief Financial Officer, Dave Cherechinsky. Mr. Cherechinsky, you may begin.

Welcome to the NOW Inc. Second Quarter 2019 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. 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 second quarter of 2019, please note that some of the statements we make during this call, including the answers 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, 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. 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 only as of the date of the live call. 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.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 disclose various non-GAAP financial measures, including EBITDA, excluding other costs; sometimes referred to as EBITDA; net income, excluding other costs; and diluted earnings 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 on 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 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 second quarter 2019 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. We are encouraged by our consistent year-over-year top line 2Q 2019 results, even though U.S. and Canadian rig counts declined and one of our largest customer's activity pulled back considerably due to their large pending acquisition. Specifically, our U.S. process solutions team was able to exceed pre-acquisition second quarter 2014 revenue levels back when rig count levels were nearly double the level we're seeing today, while leveraging our full suite of products, broad support infrastructure throughout the major shale plays and by bundling opportunities with U.S. energy centers and U.S. supply chain services. Our cross-selling of products and solutions continues to add value to our customers across a wide variety of energy and industrial products. One area of strong focus for us has been collaboration between our U.S. energy centers, U.S. supply chain services and U.S. process solutions teams, resulting in pull-through sales, new customer introductions, increased market opportunities and further market penetration. To further these efforts we have made some recent adjustments to our sales organizations to drive top line growth, gain market share and lead DNOW strategically into the future. For the second quarter, we generated revenue of $776 million, a $9-million sequential decline and a $1-million year-over-year decline, or essentially flat, in line with our guidance. Global rig count averaged 2,181 rigs in the second quarter, a sequential decline of 4%. Our annualized revenue per rig was $1.4 million for the second quarter of 2019. Completions were up 6% sequentially. U.S. drilled but uncompleted wells, or DUCs, averaged 8,277 for 2Q, down 2% sequentially. DUCs present a future revenue opportunity for DNOW, should the wells be completed, which should drive tank battery construction and midstream gathering systems.…

Thanks, Robert. For the second quarter of 2019, we generated $776 million in revenue down $1 million, or essentially flat compared to the same period in 2018. Sequentially, revenue declined $9 million, or 1% landing well within the range we guided to in our first quarter earnings call. U.S. rigs declined 5% in the second quarter sequentially and when compared to the same quarter in 2018. U.S. rigs declined an additional 4% through July 26, from the second quarter 2019 average. In the second quarter gross margins were 19.7%, down from the 20.1% level in the first quarter, and down 50 basis points from 20.2% a year ago. First half 2019 gross margins were up marginally to 19.9% from 19.8% in the first half of 2018. As we have noted, a key contributor to margin decline is hot rolled coil pricing, whose decline affects our welded pipe business, and negatively impacts our inventory replacement costs. On the seamless side, the OCTG market continues to weaken leaving more mill capacity on the market to produce seamless line pipe. The result is a downward pressure on price as the market looks to turn higher-cost inventory into cash at lower gross margins. The sequential decline was primarily driven by product margin pressure on steel pipe while the year-over-year quarter product margin decline related to high-content steel products pipe, primarily and fitting and flanges secondarily. We expect gross margins to be choppy in the near-term as the market reacts to reduced activity levels, oil and gas commodity prices, and more directly to observe steel price declines. Over the last few years, we experienced meaningful product price appreciation the primary driver for our gross margin gains. For example, gross margins were 16.4% in 4Q 2016, and grew steadily over seven of eight successive quarters by…

Thanks, Dave. Let's wrap up with the outlook for the third quarter and the rest of 2019. Looking ahead, the most recent report from the EIA showed a trend of a lower number of wells drilled, an increasing trend in completions and a slight drawdown of DUC inventory during the last quarter. With WTI trading in the mid-50s, we expect our customers to continue to exercise capital discipline and focus on operating within free cash flow generation. If completions activity grows, we could see continued benefit from our U.S. process solutions business for modular rotating, production, measurement and process equipment. This would also benefit our U.S. supply chain services and U.S. energy centers for demand for PVF especially as applies to midstream gathering projects that would be required to get oil, gas and water to their final destination. However, general industry expectations are for softening in the second half of 2019. And as I said earlier, one of our largest U.S. supply chain services operator customers announced they will be closing a major acquisition in 3Q, '19. This will put downward pressure on our U.S. supply chain services revenue for the remainder of the year as our customer continues exercising capital allocation austerity in preparation for the pending combination. In Canada, where political controversies and takeaway issues persist, the rest of 2019 will remain a challenge. As we exit the seasonal breakup period, we do expect a modest topline Canada incline. We remain cautious however, about our Canadian operations due to the continued rig declines and political uncertainty. Looking ahead internationally, we're seeing more rig activations, more jack-up and floater tenders materializing, continued increase in offshore activity in Europe and Mexico, an uptick in land-based activity in Australia and more production facilities quoting activity tied to capital projects. Recent and…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Steve Barger from KeyBanc Capital Markets.

Hey good morning guys.

Good morning.

Just first Robert, on the customer slowdown waiting for the acquisition to close, any way to quantify what that took away from the quarter and what do you expect for 3Q there?

I expect more of the same. There's just a lot going on there, so we had a pretty significant pullback, and I say significant. I mean it's in the millions in that quarter and I expect it again and again. But it's going to be $5 million to $10 million a quarter.

Okay. So pretty big, yes. And I just want to start with the two acquisitions. It's really good to see you back in the market. Any more detail on how long it'll take to bring that capacity on to support process organic growth and maybe what those acquisitions look like in terms of revenue and margin?

Well, they both have a different story. The story with the one we acquired in Wyoming is that they are -- they have a particular territory that's outside of ours, but adjacent to it where they distribute exclusively for Flowserve and that's our partner in almost all of our regions on ANSI centrifugal pumps and mechanical seals. So being able to pull our -- their -- some of their products into ours, for example, mechanical seals. We didn't have the mechanical seal line and now we get it, should help grow but it's going to take a quarter or two to get traction on that. The other acquisition was -- we've -- in Casper where we do all this construction or this fabrication, many of the facilities are assembly shops but several of the facilities are feed shops. And so we have a facility that does nothing but skids and it feeds the final assembly shops. And we have two facilities that build spools both carbon and stainless and they feed the assembly shops. Well the big feed shop we have is the ASME vessel shop and it also feeds other shops. And right now we had a choke point there because of demand and so our delivery times were getting extended to the point that it was costing us potential future revenue because customers couldn't wait that long, and so we had to come up with a solution for it and fortunately for us this one presented itself and it was a lot more economical for us than doing a greenfield expansion and the customer is -- the owner of that facility had already declared that business non-core, and they had spent several months winding that business down. So we have to -- we're going to take us a couple of quarters to wind that business up. So I don't expect anything material from those two acquisitions in three and four, but we're really excited about what 2020 could hold once we get these things integrated.

That sounds great. So this just furthers the thought process about being able to take more share with processes as those ramp up?

Absolutely. And plus most of our current U.S. process solutions business is all upstream and midstream. There's a little bit of downstream but not much. This business has a great reputation with a lot of the downstream customers with fractionating towers and other things that go into chemical plants and refineries, so being able to build on that and tie it in with our downstream industrial business to try to generate the same success in that area that we have on the upstream piece with the energy centers is pretty exciting as well. But at the end of the day also it makes us more competitive, because now logistics will cost us less to compete in the Delaware or the Midland or the Eagle Ford because we're in closer proximity.

Yeah that's good. And the balance sheet is in, obviously, great shape at what's hopefully closer to a cycle bottom than not. As your team's looking at acquisitions, is the focus more on deals that plug holes in the geography or more about finding or adding to the niche product lines that you have that provide the differentiation?

Yeah, our strategy hasn't changed over the many years. We're really looking for expansion of products and services that we can provide our customers because that benefits the rest of our business. So, for example, in supply chain we have several operators who have outsourced their procurement and inventory management to us and the more we can expand into the products that they consume regularly and add value by reducing their cost as opposed to just marking up purchases from another supplier, the more valuable we become to them and the longer and stickier those relationships can be. So we're really looking at high barrier to-entry stuff. It's not hard to go open a branch somewhere if you're selling pipe valves and fittings or MRO supplies and all you need is a little bit of inventory and some good employees and you can start competing. To get into what we do in the process solutions business is not an overnight thing and it would require a lot of capital. So, we're really looking to expand our product breadth and to acquire higher barrier to entry businesses that have accretive EBITDA margins.

Got you. And then just one last one is, does integrating these two small acquisitions slow down the M&A hunt, or do you have enough bandwidth to continue looking for those things while you go around your daily business?

No there's been no slow -- we didn't put anything on hold or slow down our team that does M&A, so I see these having almost no impact on opportunities that may present themselves to allocate capital for M&A.

Okay, and just one more. What's your comfort zone in terms of size for potential deals?

We're really not shy about size. In fact we prefer large over small honestly, because it takes resources in corporate and beyond and like IT and HR and legal. It takes almost the same amount of work to complete a small deal as it does a big deal and big deals move the needle. It's just we haven't found one yet that we wanted to acquire where we could come to terms with what they expected for the business.

Got it. Thanks. Nice job.

Thank you.

And next question comes from Walter Liptak from Seaport Global.

Hey, Walt.

Hi thanks. Very good morning guys. Good morning, Robert.

Good morning.

I wanted to ask you about the sales outlook for the back half. And I guess the question is we've seen the volatility in the last few days and I guess during the quarter around oil prices and the customers staying really tight on their budgets and cash flow. Are we underestimating what the second half could look like? Because you've got the $5 million to $10 million per quarter with the customer rolling off plus this weakness. What are the offsets to get the growth? We're seeing process solutions grow and it sounds like international could grow but I'm wondering if you can help us bucket those or quantify them so we understand how the second half is going to be flat to only down mostly opportunity [ph]?

Well, there's no doubt -- well let's put it this way. If you've listened to the earnings calls of all the drillers and if you've listened to the earnings calls of all the frac companies that do the completions and you take them at their word activity is going to be soft. The rigs are getting stacked out and frac plates for the most part are getting put in yards somewhere. So for us to deliver on our commitment for the year, we're going to have to outperform the market. Now so far we've been outperforming the market and we're pretty excited about it. But I expect some shifting in our revenue in 3Q and 4Q between the groups and I'll let Dave give you some thoughts, but like process solutions had a huge growth period, or huge growth quarter; I expect them to still perform well, but they may have some pullback because we had a lot of projects go through in 2Q. But Dave you want to give some of your thoughts on it?

Yeah, I'll give some segment view. First of all, in terms of the outlook, I think there's -- we usually have a pretty good feel for the forward quarter. But this time I think there's more unknowns than knowns. While we're pretty confident, Canada's going to emerge from breakup and we will grow in Canada, we may not see the kind of growth we normally see in Canada. And given the timing of projects in international, we think we'll grow sequentially in international, but that's like Robert says, that's one of our lumpiest most project-oriented segments. And then in the U.S., U.S. energy is probably going to be flattish. And process solutions had its best quarter since we acquired those two main acquisitions. That's one of the things we're really proudest about in the quarter is how process solutions just shined in the quarter. We expect some correction to that in the third quarter. We don't expect them to grow sequentially. And then finally with supply chain, while we have some puts and takes there we do expect some growth there. So some -- the U.S. market is going to be flattish for us and Canada and international are going to pull us up a little bit, but there are like I said there are more unknowns than knowns. So that's kind of where we're at. We generally see the third quarter as our best quarter of the year. The third quarter this year we expect will be better. But it may be more on the first quarter range or it may be a little higher. So -- and then the fourth quarter, we for the last several years have seen a sequential decline and we expect a similar decline in the fourth quarter like we -- the customer like to see. Walt, are you there? Sylvia, you want to move on?

I'm sorry I muted my phone.

Oh, there you are.

I'm sorry about that. Yes, I just had one more for you. On the pipe costs, how are you guys doing on inventory? And with pipe prices coming down, what's the revenue impact from that in the back half of the year?

Well that's a very good point, because we've seen pipe prices come down quite a bit this year and that has a double effect of, it brings down revenue levels obviously even if you sell the same tonnage of pipe and it puts margin pressure on us and our competitors. So we don't know if pricing has stabilized for pipe. It doesn't seem like it has. If the general market declines and if pipe prices continue we could see downward pressure on gross margins. We're trying to manage our inventory very tightly to mitigate or to negate the negative impact of commodity deflation. We're trying to price aggressively, while we continue to take market share and we believe we are. But our customers are smart and there's kind of product abundance right now, so they're going to be really looking for better cost and better priced material. So gross margins could come under continued pressure, but we're going to try to hold it like it is right now, but there are a lot of market forces that may impact that. So that's an issue given revenues being down in the fourth quarter and flattish to up a little bit in the third quarter combined with gross margins could bring our bottom line numbers down a little bit in the second half.

Thanks guys.

Thanks, Walt.

The next question comes from Chuck Minervino from Susquehanna.

Hey, Chuck.

Hi, good morning guys. Just -- yes I was hoping to touch a little bit more on that gross margin path a little bit as well. I think you touched on it in the prior question a little bit. I mean, it sounds like you're kind of anticipating some further deterioration there. As you mentioned in the opening remarks that you've seen as low -- on the gross margin side kind of back in 2016 in that 16% range kind of peaked up last year around 20.5%. Is that what you think the general range is? And I mean, do you think we could be heading back to 16% or do you think we're more likely heading more like to an 18% number? Just kind of the scenarios that kind of get you around that range as we kind of think about forecasting that for the next couple quarters or even the next couple years here?

Yes, the floor is much higher than 16%. We could be at the floor. I'm just saying that there are forces, if you think about it, the sentiment has kind of eroded during the year and in the last 24 hours, it may have eroded twice what it did during the whole rest of the year. So that's just a reality we have to deal with. If things get tighter in the quarter and customers are buying less and as inventory -- everyone's trying to offload there'll be some downward pressure, but that's not necessarily the case. If the market grows in the third quarter or our sales grow in the third quarter, we could see flatness in gross margins. So to answer your first quarter, we're not anywhere close to 16%. We're going to be in the 18% and higher and 19% probably for the year 19%-plus. But we really don't know what kind of gross margin erosion. Our models have it pretty flat through the rest of the year flat at the 2Q level. But of course like that's subject to change.

And then don't forget some of the pressure is competitive which it is what it is, but some of it's just due to falling steel prices. So we turn our inventory four times a year plus, so we can work through that inventory pretty quick and then the replenishment inventory is going to be a lower-cost inventory. So if we ever have a gross margin percent this year that starts with an 18% handle I'm going to be super surprised.

Yes.

Got it. That's helpful. And then just a separate question. Canada in the quarter was quite a bit better than we thought and I think Dave in your remarks just a little bit earlier, you kind of talked about how there might be some pressure in the U.S. but being brought up a little bit by Canada. That sounds to me like a little bit different -- I mean I guess we were under the impression that Canada was going to be fairly weak this year. So it sounds -- and down quite a bit. Am I mistaken in that or have things changed for you a little bit in Canada? And if so kind of what was that? Just the Q2 numbers are pretty good and it sounds like at least for the year, it's going to be maybe better than you maybe were originally expecting.

Yes. Canada has shrunk two years in a row, but we're very much holding our own there. Rig count declined in Canada in the second quarter 22% and our revenues are essentially flat. We believe we're gaining market share there. And I talked -- or Robert and I talked a lot about process solutions being one of the stars in our quarterly results; Canada is certainly up there. So we feel confident about Canada. We almost always see a third quarter emergence from breakup recovery. We expect to grow -- and so that's why we expect to grow in the third quarter. We don't expect to grow at the same kind of rates we normally would into the third quarter, but we'll grow there. So while the market's shrinking I think we're taking share and it's showing in our numbers.

No doubt about it.

That's great. And is the Canada business -- I mean is the rig count still the best proxy for you guys there or are you selling into some other markets there that maybe aren't as rig-exposed and maybe tracking the rig count isn't quite the best way to do that?

It's -- that market has got -- there's several pieces of market in that market. So obviously from the upstream piece, we really track closer to well completion -- oh not well completions -- spuds and wells drilled. Then you get into the oil sands, which is a whole other animal and then we're really, really big into the midstream market in Canada. So there's a lot of things that affect our Canadian revenue.

Yes. I mean rig counts isn't correlated like it would be in the U.S. but it's a barometer. And so we look at it as one of our kind of bellwethers for what we should be earning in terms of revenues up there.

Thanks a lot guys.

Thank you.

Our next question comes from Nathan Jones from Stifel.

Hey this is Adam Farley on for Nathan.

Okay.

I just wanted to turn back to U.S. process solutions. Obviously a real good quarter outperformed the market and you guys are likely taking share. I was wondering if you could give an update on the turnkey solution for tank batteries? How is it being accepted and particularly in the Permian and then maybe some of your growth expectations there?

Yes so we're gaining traction and what I mean by that is, when we first started out attacking these other shale plays that they had never operated in before by using the Odessa Pumps infrastructure, we were getting tested. Somebody would order 20 LACT units or somebody would order 20 oil and gas/water separators or whatever which would go to 20 different pads instead of buying the full kit for a pad. And then it grew and then we had one customer that actually went the full enchilada and ordered everything on the well site; loved it so much ordered four more. That particular customer is having some issues right now just with production and living within cash flow so they've not reordered any more than the 5. But what we have seen is some other customers that are ordering instead of -- if there's 12 pieces a kit on a tank battery they went from ordering 1 to ordering 2 to ordering 3 to ordering 4 and so we're making traction there. Not as fast as I want, but the order intake volume from those customers is still really high because they're ordering certain pieces of our kit to go to like 5, 10, 15, 20 well pads as opposed to just a single well, all the kit on the one well pad. So from a revenue perspective, it's not disappointing. Just from the check-the-box perspective more customers are adopting, it's on its way there and it's headed in that direction and they're adding more and more kit, but we're still looking for a full adoption and we're not quite there yet.

Okay, that's helpful. And then I found your comments around midstream water pretty interesting you know produced water is likely to increase in the shale plays and investment's probably going to be needed there to address that. Could you just talk about how that midstream water market is developing and then how DNOW directly benefits from it? Thanks.

Well it's -- as you can imagine if you're going to be in the water business, whether you're an oil company, a midstream company or a pure water-management company you've got to have pumps. And we have -- especially in the Delaware -- well pretty much all the way from the Eagle Ford to the Bakken we're the largest pump distributor in those spaces. So there's a lot of benefit there because we have high-quality brands that customers want and then the real benefit is those pumps have to be connected with pipe valves and fittings and valves and actuation and so by bringing our process group in with our energy group and bringing the entire package, it becomes easier for that particular target customer to work with us because they have less vendors to deal with and we have the brands and the products they're really most interested in which is which multiplex pumps are we going to -- do they want? Which HPumps do they want? Which ANSI centrifugal pumps do they want? And when you can meet that demand the pipe valves and fittings become a secondary conversation. Whereas if you didn't have that they would just be bidding you out on pipe valves and fittings against everybody else who has pipe valves and fittings. So it's a nice growth market for us and I expect a lot from it.

All right. Thanks for taking my questions.

Our next question comes from Marc Bianchi from Cowen.

Hey, thanks. If I'm hearing you guys right, it sounds like you're expecting U.S. to kind of be flat in the third quarter and I was hoping you could go through the details a little bit more. It sounded like, if I kind of take what we've heard from some of the OFS companies that you talked about HP Patterson talking about rig counts being down high-single digits I think Patterson's completion activity is down 10% in the third quarter. So is that the kind of market outlook that's underlying your expectation for flat? And then also I think there was a supply chain customer that you mentioned that slowdown. So if you could just help us kind of bridge all that, it would be great?

Well, we talked about U.S. energy being flattish; it could be up or the U.S. could be up -- the U.S. energy is looking flattish to us because as Robert mentioned in his opening comments, we had a $9-million order -- pipe order that won't recur. So that's something we'd have to overcome for the U.S. energy group to grow. We think supply chain will be up like we said and process solutions down, so that's going to be the major drivers for the quarter. Again that's going to be -- we talked about winning some new customers. Depending on the timing of when those revenues materialize that could be some uplift in the third quarter as well.

Basically in a declining market which is pretty much what the drillers and the completion companies have stated on their earnings calls the last three weeks, we're hoping to flat or up slightly to overcome the market, but that's going to require taking share like we have been.

Got it got it. Okay that's really helpful guys. Thanks. And my second question is on just the working capital. You've done a great job here to get the ratio to sales down to below 21% this quarter. I would suspect that you get some more working cap release throughout the back half of the year, if kind of the overall is flat to down. But how do you think of it in the context of that 20.8% that you delivered this quarter as we roll through the back half?

I think we'll see similar or better working-capital-to-revenue ratios. We do think revenues will be down a bit in the second half, so we'll see receivables -- the opportunity to generate more cash from reduced receivables. Because the market is flat to down and it's really a little bit easier to gauge inventory SKU quantity requirements, we'll be able to pull out more inventory. So we're living in the space that the second half free cash flow is as good or better than the first half free cash flow. And we always want to get our working capital as a percent of revenue closer to 20%; we're making nice progress there. So we've got all hands on-deck to really accelerate the movement of working capital and liquidate as much as we can and enable us to gain market share. So that's kind of where we're at right now.

Great. Thanks very much. I will turn it back.

You’re welcome.

Our next question comes from Vebs Vaishnav from Howard Weil.

Hey good morning. I guess the process -- the sorry supply chain -- understand what you're talking about on the existing one customer. But if I'm not mistaken you were working on getting one other large customer into supply chain. Any progress on that or either for that one customer or how you think about adding more customers to your supply chain?

Yes that's -- as you -- I think as we've discussed before that is our longest-cycle sell because it requires a huge culture shift in the particular customer that you're targeting and not all customers meet that model. So, if you've got a smaller pool of customers that actually have all of the indications that -- based on their culture, their size, their facilities, their concentration in certain plays all that stuff it limits the customers. And we have -- we always have two or three customers that we feel like are just right around the corner, but they always seem to take three months, six months, nine months, 12 months. So, we have several conversations going on. I hope that we're surprised soon with another win, but really it's just so hard to forecast that because it takes the CEOs and the CFOs, and EVPs of Ops and the VPs of procurement all to finally take the big plunge so. But then again the other four were the same way and we got them across the finish line so it's not impossible. It's just a really hard sell.

Got it, okay. On M&A you guys did do M&A. Can you just talk about how you are thinking going forward? Is it mostly going to be in Permian or are there more that other product lines that you can you are thinking about from an M&A perspective?

Yes, so as it applies to U.S. process solutions which is typically where we would be doing M&A, it's about expanding product lines or expanding to geographies where we don't currently service. So -- or don't -- or we don't have a big presence in that particular group. So, I would love to go out and do some large M&A actions with companies that would expand our product lines in that particular group but they're hard to come by. So, these legal bolt-ons deals that we're doing that carry low risk, that are -- don't consume a lot of cash that really we can plug them into the network and grow them rapidly because they don't have our network that's kind of where we've been headed. But the minute that a larger one becomes viable and the stars align and we -- our bid-ask spread shrinks to zero as far as what they expect and what we're willing to pay, I couldn't get Dave to write the check quick enough.

Got it, okay. And maybe one margin question. So, gross margins have come down like 40 bps each of the last two quarters. You guys talked about how we are seeing a softening market and more pressure on gross margins. Any help you can give around like well should we use -- should we assume the similar decline in gross margins or how should we think about for the third for the next couple of quarters?

Yes, I wouldn't assume a similar decline, although that could happen. They could be flat. I mean it's going to matter on many things -- who the customers are, what the product mix is, do steel prices continue to decline, are we able to quickly liquidate our over-costed inventory? And I talked in my opening comments about how we've got kind of a squeeze on margins right now because steel-related products those product costs are coming down so our margins are squeezed there. And as we turn our inventory we'll be able to eliminate that squeeze and bring margins up to that element of gross margin. So, that's a very hard thing for us to gauge. There are some headwinds like steel price declines in a market that's kind of soft, so those are not favorable to gross margin gains, but we're doing all we can to mitigate any further erosion of gross margins and we'll just have to see how that plays out.

Yes, that's probably one of the single hardest items for us to forecast because you have thousands of employees out there processing millions of transactions and we try to give them all the tools we can to help them push price. Like we have a system that helps them recommend price based on the market they're in and the replacement cost of materials and all that other stuff so it's really difficult. Like there's several quarters in the last 12 that if you had asked like can you grow margins 70 basis points? I'd say no and we went over that. And then we had another quarter where it went up 170 basis points and I never would have forecast that. I didn't think we'd be at 19.7% right now personally. So, it's just a really hard number to forecast. But if you believe some of the pipe manufacturers that have already reported -- I have not found any evidence of this but these are people who do this for a living, they expect hot-rolled coil to increase throughout the rest of the year. If that does that'll completely change our perspective on gross margin percent. So, we'll see how that goes but definitely inflation's great but inflation I'm sorry deflation and a competitive slowing market is what puts the biggest squeeze on margins.

That's very helpful. Thank you for taking my questions.

Thank you.

Thanks Vebs.

Ladies and gentlemen, we have reached the end of our time for the Q&A. I will now turn the call over to Robert Workman CEO and President for his closing statements.

Thanks everyone for dialing into our call today and thank you to all our employees who helped us put out some amazing results and we look forward to talking to you in about three months regarding our 3Q results. Thanks.

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