Good morning, and welcome to the First Quarter Earnings Conference Call. My name is Brandon, and I will be your operator for today. 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 Vice President, Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Good morning, and welcome to NOW Inc.'s First Quarter 2021 Earnings Conference Call. We appreciate you joining us, and thank you for your interest in NOW Inc. With me today is David Cherechinsky, President and Chief Executive Officer; and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the DistributionNOW and DNOW 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. Please note that some of the statements we make during the call, including responses to your questions, may contain forecasts, projections and estimates, including, but not limited to, comments about the outlook for the Company's business. These are forward-looking statements within the meaning of the US 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 in the quarter or later in the year. We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest forms 10-K and 10-Q that NOW Inc. has on file with the US 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 maybe found within our earnings release, on our website at ir.dnow.com, or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by US 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 have not been calculated in accordance with GAAP. A reconciled on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included within 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 first quarter 2021 Form 10-Q today and it will also available on our website. And now let me turn the call over to Dave.

Thanks, Brad. Good morning, everyone, and thank you for joining us. As we post earnings for the first quarter of 2021, and tell you our story and talk about what we're building for the future much has changed. During the last 12 months, we had seen rigs laid down, budget slashed, projects cancelled, well shut-in, contractors sent home, and for the first time negative oil prices, making for perhaps the most bleak energy predicament since the Great Depression. From what was a great shutdown, just one year ago, to now a period of relative stability with strong oil prices, the economy strengthening, hiring ramping up, and anxious consumers clamoring for a reversion to the norm. The underpinnings around the things that drive our business are encouraging. While DNOW entered the downturn on firm financial footing with no debt and ample excess cash, we committed to transform our business. We committed to get to breakeven EBITDA in the first half of 2021 with those who cover our stock earmarking us for a full year 2021 EBITDA loss. Yet, we're happy to say, we achieved our goal of returning to positive territory one quarter earlier than committed after just three short quarters of the EBITDA losses in the worst market ever. But survival and breaking even our ambitions ranking at the lowest levels of Maslow's hierarchy of needs, survival has never been an issue for us. The challenge for us then and the opportunities now is for DNOW to pursue self actualization as an organization to fully achieve our potential as a team and as a partner to our suppliers and customers. We have talked exhaustively about a customer order fulfillment, migration and modernization, where we adapt our geographic footprint to be customer proximate, while reducing our cost structure to be more…

Thank you, Dave, and good morning, everyone. Total first quarter 2021 revenue was $361 million, a 13% increase over the fourth quarter of 2020. Outperforming our guided sequential mid to high single digit percentage range. Our first quarter results showed sequential growth across all segments. The U.S. first quarter 2021 revenue was $252 million, up $28 million or 13% from the fourth quarter on increased drilling and completions activity, despite the disruptive impacts from the freeze brought by winter storm theory. Our U.S. energy centers revenue was up 12% from the fourth quarter, and U.S. process solutions revenue was up 14%, driven primarily by increased drilling and completions activity and seasonal recovery. U.S. energy revenue accounted for 81% of the U.S. segment in the first quarter unchanged from the fourth quarter. Moving to the international segment, sorry, moving to the Canadian segment. First quarter 2021 revenue was $58 million, up $10 million or 21% from the fourth quarter, driven by seasonal increases in the market and customer share gains driven by greater attraction to DNOW’s unique combination of application based solutions and products. The stronger Canadian dollar relative to the U.S. dollar favorably impacted sales by approximately $2 million sequentially. Outside of North America, project deliveries in the Middle East, coupled with partial easing of COVID lockdowns and travel restrictions in certain areas, drove international revenue to $51 million, an increase of $4 million or 9% from the fourth quarter. Stronger foreign currencies relative to the U.S. dollar favorably impacted sales by approximately $1 million sequentially. In addition to the DNOW's growing revenue is 13%. In the quarter, our product margins remained resilient and gross margins improved to 20.8%. This increase was primarily a result of reduced inventory charges sequentially from 24 million in the fourth quarter to 5 million…

Thank you, Mark. And now, our view on the second quarter. Like we mentioned, first quarter 2020 revenues were up 13% over the fourth quarter of 2020, outperforming our guide and generally posting much higher sequential growth than most companies in our space. We attribute that solid sequential revenue incline to the timing of projects in the first quarter, and strength with our upstream customers. We do not expect first quarter international projects to recur and as such, anticipate international to be relatively flat sequentially in the second quarter. While Canada grew 21% sequentially from the fourth quarter to the first, you might see the reverse occur as Canada moves into break-up in the second quarter. Finally, we expect solid US sequential growth going into the second quarter to be similar to US growth in the fourth to first quarters. As such with fewer international projects, the expected seasonal Canada reclimb and strong US revenue gains, we expect second quarter sequential revenue growth in the mid to high-single-digit percentage range. And now some closing thoughts. We've expanded our ability to deliver solutions across the full lifecycle of a project, from early feed stage work to engineering, design, construction, management, commissioning, aftermarket support and lifecycle asset management. As an example, if you take a six well pad project that includes wellhead hookups, a tank battery facility, fluid handling, gas recovery, compression, produced water transfer and disposal, gathering lines and midstream tie-ins, DNOW offers a unified solutions approach towards the project. From inception to start up, to aftermarket and materials management support. From the scope of supply perspective, DNOW delivers the engineered, fabricated, quality control process and production equipment, PBF for flow lines and instrumentation controls, while performing the field construction, asset tie-ins and commissioning before handing the keys to the operator.…

Hey, good morning, Dave, Mark, and Brad.

Good morning, Jon.

So, I appreciate the second quarter guidance for revenue to be up mid to high single-digits and the kind of geographic breakout that you gave us. I was wondering if you could help give us an idea of how revenues trended kind of throughout April. And what's kind of assumed for the monthly progression of revenues to get up the mid to high single-digits in the second quarter?

Okay. So let me start a little bit with the first quarter. So January started off slow. I think we mentioned that in our February call. And during our February call, we were in this room without heat and we were contemplating giving guidance, and we moderated it with based on 60 locations hadn't been closed at that time. So February was slow due to that slowdown in our business. March however, you know, really took off. So there was a little bit of a snap back. And March ended up being the best month of the quarter. And it made for a real nice revenue increase sequentially. Now, April was down versus March, in part because it's a shorter month, It's fewer business days for me DNOW and its customers and partly because March was so strong. So we're starting off kind of slow, but we do expect things to get a little better. Of course, Canada, in breakup in April's probably the worst month of the quarter for Canada. So we experienced that as well. So, you know, we feel – we feel pretty good about, you know, except for Canada, recline as we called it in terms of moving into breakup. We expect the US to continue to grow. And we expect some flatness internationally. But that's kind of the cadence of how things happened during the first months of the year.

Understood. Thanks for that. And then, obviously had really strong performance on the gross margin front in the quarter. Curious if just on the sustainability of that level of margins in 2Q and then later in 2021, obviously you have inventory charges that you need to consider. But then, also what were the moving pieces between pricing of mix, it seems like pricing will be a bit of a tailwind as we move through this year. So curious, if you can help us out with – is the 1Q margin level a good starting point for the second quarter and beyond? Thanks.

Okay, so in terms of the change in margins, of course, the lack of inventory charges have a big deal to do with that, as your question implied. Inventory charges during the quarter were $5 million, more of a normalized level, not so much as a percent of revenue. But where we are in the cycle, those will be in that – in line with that during the year, could be a little higher, could be a little lower, depends on – we are going through some level of restructuring as we stand up supercenters in our business, and change the role of what will become express centers to maximize inventory utility and derisk the inventory component of our business. But I think gross margin, this is a good level for us. And there will be some puts and take. So in the second quarter, Canada is a higher operating margin business for us. They're our most profitable segment right now. They tend to have higher gross margins as well. So they're going to shrink in the second quarter. We're going to see some continued strength in the US, but we do see – expect to see some projects, which will be a little bit of a drag, which could mean a little bit lower gross margins in the second quarter. I mean, I’d like to think – I think Mark said it, that our first quarter gross margins were the highest since we've spawned seven years ago. And I like you know, I think there's a gravity component there. Well, there's likely going to be a little bit of a reduction in the second quarter based on the things I said with Canada, some project works in the US, et cetera. But the underlying product pricing and product margins for us are strong. And to your point, I think this is a good level for us in terms of gross margins. Those numbers could get a little better, as we start to see inflation, lead times grow, demand increase, you know, kind of all the things that would pull pricing in our favor.

That's all. So Dave, thanks. I'll turn it back.

Thank you, Jon.

[Operator Instructions] And from Northland Capital, we have Doug Becker. Please go ahead.

Thanks. It was a really good quarter on the cash conversion cycle, working capital x cashes, with stronger sales, lowest seen in fairly at least quite a while. Understand that's going to increase a little bit in the second quarter. Have there been any revised targets regarding working capital, cash conversion cycle, as we go through the year? Just seems like a really important aspect of the story, as activity increases and working capital requirements normally increase?

Sure, Doug. Yeah, this is Mark. Appreciate that. And you're right, this quarter on strong sequential revenue growth inventory came down. And so you're right, I think we expect as we model in 2Q, there'll be some easing of that, where we'll see some consumption of cash. And so I think as we -- as we model the top line growth, you can see $30 to $40 million range of working capital put on the balance sheet as we grow receivables and inventory to ensure we support these customers. But again, we're continuing to take actions, to create an efficient balance sheet, to minimize that impact on our cash consumption. So again, that’s the range, but again, we're well below the 20% that we've talked about in the past, and we're taking measures to remain lean.

Yeah. Let me add a little bit there. So if you go back a couple years and routinely, our working capital excluding cash as a percent of revenue is 25%. Before that, it was even higher than that. So that's been a major focus for us. And it served us well as we entered the downturn because we had a much more responsive balance sheet. And we had kind of a -- very kind of conservative approach to managing the balance sheet. We had a focus on that, and we got a working capital turns to be very high in this quarter. So there'll be a little bit of an increase. But they're going to be in that 15 to 20 range, and we're going to try to keep them closer to 15. But -- we are moving into a modest recovery, so we're going to be buying more strategic inventory, not like we might have in the past, where we would be buying a lot more spec stuff that we'd ultimately have to deal with in a downturn. But we're going to be real thoughtful about what we put on the shelf. But we want to take advantage of the recovery. We want to have products when our customers need them, especially the high demand predictable less risky stuff. So we're going to see a little bit of a reduction there, primarily because we're going to see a revenue decline in Canada, which is going to be just a numerator impact. I think it's a numerator. That's a major focus for us and it will be going forward.

That all makes sense. The $30 million to $40 million that you mentioned, Mark, that's for the full year?

No, I was just looking at a sequential bill. If you hold the efficiencies, let's say where we are now maybe with a little bit of easing, just with that revenue growth alone, we're going to add that sum to the balance sheet. Just looking at working capital as a percent of revenue staying similar, we're going to put on some level. But again, I mean, $600 million in liquidity, managing our balance sheet is something that we're interested in doing by ensuring we're taking care of our customers, especially in this period of time where we're seeing growth here in the US. It's something that you're right there, there's not a peg for us to need to generate liquidity in the moment to make any kind of payments or anything like that.

So, yeah, I mean, I think that's a good range, maybe more $20 million, $40 million that we would consume in the second quarter, if we see the kind of revenue progression we expect. Now, Mark talked about in his opening comment, that we generated $400 million in the last eight quarters. That's, you know, you understand that the kind of cyclicality of our business. Now we're in the cash consumption phase. But we're going to go into you know, a little more wide open eyes in terms of the risk components of the inventory put on the shelf, but we also want to see is that growth

Understood. Obviously, a pristine balance sheet, just want to get a little color on the M&A pipeline in the near term over the next couple of quarters?

Okay. So we just closed two acquisitions and we're excited about them. And that's a major focus for us is successful integration and returns on those acquisitions. However, our deal team is dropped -- is off those integrations. We have a separate group working on that. And we're still looking for deals to fall into the company. Now we're moving into an organic growth phase. So like we've already talked about on this call we’ll be consuming cash on that front. And we are always selective about the acquisitions we find and we worked on. And the ones we just closed, we -- those were those are good deals for us. And we're going to remain highly selective. So we're looking -- we're talking to companies. I think it's as vibrant a pool of possibilities with the acquisition came as it was before we close these two deals.

Thank you.

Thank you, ladies and gentlemen, we've reached the end of our time for the question and answer session. I will now turn the call over to David Cherechinsky, CEO and President for closing statements.

Okay, so thank you very much everyone for calling in. We appreciate you listening to the call and we'll see you next quarter.

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