Hello, and welcome to the NOW Inc. Second Quarter 2022 Earnings Conference Call. My name is Nadia, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Vice President, Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Thank you, Nadia, and good morning, and welcome to NOW Inc.'s second quarter 2022 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 this call, including the responses 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 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 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 for 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 their earnings release or 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 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 have not been calculated in accordance with GAAP. Please refer to the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of 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 second 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 2022 Form 10-Q today and will also be available on our website. Now, let me turn the call over to Dave.

Thanks, Brad, and good morning, everyone. I'm thrilled to be here today celebrating a record breaking quarter, the 6th consecutive quarter of significantly improved financial performance and prospects for the company. What an exciting time it is for DistributionNOW. Revenues in 2Q '22 were 14% stronger than the first quarter well above what we guided and 35% higher when compared to the same quarter in the prior year. Our gross margins climbed to a high watermark of 23.7%, aided by healthy project product margins, resulting from inflationary headwinds, lower inventory costs and pricing benefits, which outpaced our previous full year margin guidance in the 22% to 22.5% range. Warehousing, selling and administrative expense or WSA was driven down to its lowest level as a percent of revenues since the third quarter of 2014, a time and another era when there were 1,900 U.S. rigs more than 2.5x the 2Q '22 level. EBITDA in the second quarter was $47 million, with 2Q '22 EBITDA alone exceeding the results produced in all of 2021, representing again the highest levels of EBITDA since 3Q '14, a bygone era, given today's significantly improved rig efficiencies and capital discipline by our customers. EBITDA in terms of percentage of revenues was 8.7%, an all-time record achievement. Working capital excluding cash remained strong, turning more than 6.5x annually enabled by continued healthy inventory turns, despite planned inventory growth, which were pre-positioning to ensure that products are available for our customers and to strengthen our indefatigable push to maximize gross margins. And late in the second quarter, we closed on a small but potent U.S. process solutions acquisition and expansion on our 2021 Flex Flow purchase, fortifying our leading position in horizontal trailer mounted rental pumps. [Technical Difficulty] are without a doubt, a result of the loyal and…

Thank you, Dave. And good morning everyone. Total second quarter 2022 revenue was $539 million an impressive 14% increase or $66 million in growth over the first quarter of 2022. On a year-over-year basis we saw a strong second quarter 2022 performance spearheaded by revenue growth of $139 million or 35% and elevated our EBITDA profitability to a record setting 8.7% or $47 million for the quarter, an EBITDA level nearly 6x what it was one year ago on solid operational execution with improved gross margins. The U.S. revenue for the second quarter 2022 was $408 million, up 22% or $74 million sequentially, and up $112 million or 38% year-over-year on continued strengthening and rig count persistent depletion of DUC inventory and increased completions activity. Our U.S. energy centers contributed approximately 79% of total U.S. revenues in the second quarter, with our U.S. process solutions contributing the balance of 21%. Turning to Canada for the second quarter revenue was $72 million, down $10 million, or 12% from the first quarter of 2022 as a result of typical seasonal breakup. However, it's worth noting that this quarter was the smallest second quarter pullback on record, thanks in large part to the enduring efforts of our excellent sales and operations teams executing and winning projects and additional business in the market, which also translated into year-over-year second quarter revenue increase of $21 million or up 41%. International revenue in the second quarter of 2022 was $59 million, up $2 million, or 4% from the first quarter. When excluding the impact from foreign currency exchange rates, second quarter international revenue increased 7% sequentially as the stronger U.S. dollar relative to foreign currencies unfavorably impacted sales by approximately $2 million compared to the first quarter of 2022. Year-over-year second quarter international revenue increased 11%…

Thank you, Mark. And now turning to our outlook. For the third quarter, we expect sequential revenues to increase in the mid-single digit percent range, a significant upgrade to our guidance implied from the last quarter. We expect gross margins to revert to the first half of 2022 average still at record high levels. With the recent acquisition in our results for a full quarter, paired with investments in our people, and a few projects to fuel future growth and productivity, warehousing, selling, administrative expenses are expected to increase the $2 million sequentially. However, I want to highlight that the percentage of revenue to WSA in the third quarter will be similar to the second quarter historically low performance of 16.5%. Our expectation is for EBITDA dollars to be flat to down low single digits in 3Q. Again, much stronger than the implied guidance from the last quarter and at record high levels. Halfway through the year, we are significantly raising our full year guidance and expecting 2022 to become our highest revenue growth percentage increase and strongest EBITDA percent year ever. With 2022 full year revenue now expected to grow up to 30% compared to full year 2021, with EBITDA approximating 7% of full year revenue, which would represent a 420 basis point improvement from 2021 or add in approximately $100 million in EBITDA dollars year-over-year. Even with much higher revenues than forecast, our expectation is to generate positive free cash flow in 2022 with the timing of impacts to our supply chain, in the contours of an expected fourth quarter seasonal pause as our customers catch their breaths as variables to this input -- to this pursuit. And in conclusion, I'm excited about how DNOW has transformed for the future. And I'm proud of our record EBITDA generated in the second quarter and the first half of the year. These results reflect the transformative two year journey that the organization has made laying the groundwork for making this incredible turnaround indelible. I'm honored to serve alongside each of our highly talented women and men for inspiring one another, and fostering an inclusive people first customer centric culture. We are singularly focused on delighting the customer every day as we win the market and pursue sustainable growth into the future. With that, let's open the call for questions.

Thank you. [Operator Instructions] And our first question today comes from Tommy Moll of Stephens. Tommy, please go ahead. Your line is open.

Good morning, and thanks for taking my question.

You're welcome. Good morning, Tommy.

Dave, I wanted to start on gross margins. I believe the 24% you just reported was an all-time record since the IPO and also that it was probably a little bit of - yes. And probably a little bit above where you had even anticipated a quarter ago. So I wonder if you could comment on some of the upside drivers there in the second quarter. And then it sounds from the guidance like you might reset a tad lower in Q3 and if you could give us some of the drivers quantitative or qualitative there as well, that'd be appreciated?

Sure, sure. So in our last call, we talked about expecting full year gross margins in the 22% to 22.5% range. Of course, the second quarter was well above that, but of course, the guidance spoke to the full year. So we go through a process where DNOW happens to be in a very enviable position in its upstream focus. We're clearly number one in terms of distributors in the upstream space. So we have a priority with mills in terms of pipe availability and other types of products. And as we've talked about the last few quarters, we've been building inventory, proactively given the inflationary aspects of really all products consumer and business oriented. So, we have a difference in our inventory value versus the street price for products we sell to our customers, and we enjoyed a really nice pop in the second quarter. We've been planning some projects, one large one that hit in the second quarter for about $9 million, that good margins again, because we had access to products and we kind of forethought the preposition of inventory to maximize gross margins in the short-term. It's been a campaign of ours to significantly improve gross margins. But we did benefit from those kind of events culminating, but now we're seeing a bit of a convergence in supply and demand for pipes so we expect those margins to narrow a little bit, but we're still in the record realm. We still expect very strong gross margins in the second half, but we don't expect 23.7% to be the norm.

Yes, that's helpful. Thank you, Dave. You mentioned the two-year transformation journey you've been on. And that includes a lot of different areas gross margin, operating leverage others. I wonder, is it possible at this point, Dave, to talk to what kind of operating margin or adjusted EBIT margin is a reasonable goal here, as you move forward? I mean, we’ll start to think about 2023 or already have really, and what kind of incrementals are reasonable, assuming the market continues to grow? Is there any way to kind of wrap it all up and to where you might land through the cycle on a margin basis?

From EBITDA perspective, we believe for the full year 2022 that will be at 7% EBITDA, that's a high watermark, that's well above anything we've produced in the past. Along those lines, we're trying to stand up a model that maximizes proximity to customers, and the efficiencies to deliver the products that they see the most value in. Meaning, we're going to find the product lines, where we have the best positions in the best costing, the best potential for large gross margins, and will favor those and apply our resources, human capital, talent to those endeavors. So that's a main kind of focus for us. Now what is 2023 look like? That's of course, it's hard for us to say, we expect the market continue to grow. We expect strengthen our gross margins. We are enjoying - in the second quarter kind of, we call it a high watermark, because we don't think that'll be the norm going forward. But we still have model improvements to make efficiencies to achieve. And the companies we're buying are all significantly higher gross margin businesses, significantly improved EBITDA. So, we expect to be in this 7% realm, certainly in the near term, with goals to grow on that in future years. So that would probably be the starting point. Now, a year ago, I of course I would never would have forecast, saying that 7% would be a standard for us. We generated, I think, last year 2.8% EBITDA after a really rough 2020 and we were very happy with those results. Now we're at 7% and we were hungry for more. So, that's kind of where we're at and where we're heading going forward.

Thank you. I appreciate it. Last one from me, just on the repurchase authorization. Can you talk to what the catalyst was to go ahead and make that announcement or rather for your Board to go ahead and make the decision now? And now that the decision has been made, how aggressive do you anticipate being at these levels?

Well, I think the catalyst was we see, for some time, our shares have been trading at a material discount to what we think - the shares are worth. We've continued to improve our earnings profile. We have a pristine balance sheet. We thought there's more value in our stock. So, we're going to buy it at the appropriate time at the appropriate price. The catalyst was primarily that. We think we’re undervalued. In terms of the aggressive – the pace of buybacks, I think we're going to be opportunistic there. We're going to buy it at the right times, with a primary focus, which I want to make this point, primarily, we're focused on acquisitions, to the extent organic opportunities are fully exhausted. So it's organic growth. And we've been really focused on that acquisitions as a primary capital allocation mode. And then share repurchases at the appropriate time to improve, the value to our - to the owners of the company. So, I think in terms of how aggressive we'll be, I think we're going to just be opportunistic. And we set an amount we think we can execute on fully and we intend to do that over the next couple of years.

Thank you. I appreciate it, And I will turn it back.

Yes, thanks for your questions.

Thank you. And our next question comes from Doug Becker of Benchmark Research. Doug, please go ahead, your line is open.

Thanks. Following up on the share repurchase, is it fair that this is going to be a tool used through the cycle and not just during a down cycle?

Yes, this is Mark, I agree. I think, we have this vehicle expiring in the end of 2024. And so, for us, it's just another tool in the toolkit. And so, the other thing I would enhance - what Dave mentioned earlier, is also the free cash flow generation, and a growth cycle for us, historically, isn't positive, we're consumed cash and growth cycles. So reaching, these levels of growth and with the commitment to not need, the liquidity to fund that growth in that way, provides us the opportunity, to have this authorization. And clearly a growth period now, and you know on the counter cyclical side of our cash flow, and what - if the market goes the other way, we generally generate tremendous amount of cash off the balance sheet as well. So really, this just becomes another avenue for us to evaluate the use of our liquidity. And so, organic growth that you've seen over the past several quarters we've been very intentional with the money there. Also looking at acquisitions, you know, when those multiples align and we see there's value there and the return, and as Dave highlighted the third element, which for us, it's highly flexible. Our share repurchase gives us that flexibility to be in the market when we think it's the right time to be in the market, but also be able to focus on inorganic growth with M&A. So I think it'd be a three cycle vehicle for us.

Now it makes sense, and real positive, clear positive signal that generating ability of the company through the cycle. Speaking of cash, and maybe more specifically, free cash flow, wanted to get a little more color around your free cash flow assumptions in the back half of the year? And I guess, more specifically working capital, given the seasonal slowdown and maybe a more succinct way of summarizing. If there's growth in the fourth quarter, do we actually see free cash flow dipping negative modestly for the year?

Yes, that's a good question. And Mark might add to my answer. Almost every year, we see revenue decline in the fourth quarter, even in a strong growth, second half to 2021, we saw revenues decline. We think that, given the stresses in the market, and in the pace of growth this year, that we're going to experience that same kind of decline. And therefore, our customers, like I said, in my opening remarks, they - have a chance to catch their breath, catch up old payables. And we can clean up our books that way, but we expect a slight dip. Now, if it went the other way, then it would strain our ability to generate free cash flow in that period. But so we - but the offsets to that would be we've been building inventory. And we've been adding a lot of inventory I think that pace will decline a little bit. So the prospects are still pretty good. We said on the last call, we would consume cash in the first half, we still think it's, a good shot that will generate free cash flow in the second half, primarily in the fourth quarter.

Maybe jumping to international growth for next year, some of the large service companies about 15% give or take growth. We're seeing offshore pick up and you alluded to some of the increasing number of projects. And is it reasonable to be thinking about international growth for DNOW double-digits next year? I know it can be very lumpy, but everything seems to be lining up pretty nicely for that business?

Yes, Mark go ahead [ph].

Yes, no I would agree. I think the print, and what we're seeing in activity, lends itself to another year over year growth in the international segment. So certainly exciting to see we're well positioned there and I would agree, I think its double-digits. I mean, it's early for next year to full guide, but it feels right. It feels like there's a lot of opportunity and optimism for the international market next year.

Thank you.

Thanks Doug.

Thank you. [Operator Instructions] And our next question goes to Nathan Jones of Stifel. Nathan, please go ahead, your line is open.

Good morning, everyone.

Good morning,

Good morning.

Just wanted to follow-up on gross margins, obviously benefited a little bit from having low cost inventory versus spot prices, you've seen some of the prices come down, particularly on steel, what are the risks or what do you see is the risks of maybe a quarter or two, where you end up with higher cost inventory versus, the spot price on the street, and we see a little bit of pressure on gross margins?

That's something we're watching closely. I don't think for close to that - convergence of price and cost, but we are seeing, the cost of pipe coming up. But we still have a margin for selling that pipe at a profit, obviously. So that's something we watch for. And when we're planning inventory purchases, as to, what's happening to the price the customers willing to pay versus our cost to acquire that inventory. And - we still have very healthy margins here. We expect that to continue, at least for the next several quarters.

Great, I'd also be interested in hearing a little bit more about the WSA investments that you're looking to make in the third quarter and going forward. I guess the investment in people is probably just adding heads. If not, I'd love to hear about it. But particularly interested in hearing about the technology investments that you're looking to make what kind of efficiencies do you think that's going to generate? How it better sells to customers, et cetera?

Okay, so I'll start off there. If you look at where we're at today, in terms of last year, head counts, actually down 75 people probably today versus a year ago. Some of that's intentional and most of that's unintentional. You know, there's a, it's difficult to find people in this environment, everyone's experiencing that. What we're facing is increased base wages due to the great resignation that affects us quite a bit. I think that's pretty universal. We've seen bonuses, and variable comp increased significantly, because we're performing very well, in terms of operating profit performance, we resumed our 401(K) in 2022, that kind of added cost as well. And now we're investing in training and technology, which Mark can talk a little bit about. But basically, it's been variable comp cost driving the biggest changes, because we've achieved efficiencies in the business. But some of the, kind of universal impacts from great resignation have been felt, I think, pretty broadly in industry. Mark, do you have anything to add to that?

I think, two years ago, we talked a lot about working to get our costs to revenue in line and finding ways to become more productive as a business. And really, the downturn required that and we're kind of upping our investment here in the second half of the year on similar initiatives to continue to make our employees and our customers lives easier to do business with us. And so, some of that is internal software, investments in technology, and also some processes that that help really remove errors and make it easier to do business. And so, you'll see some of that investment come in, in the second half of the year. Because as Dave says, we're not finished, fine tuning the model. And we certainly have the liquidity to invest organically. And we're going - to do that here in the second half so.

Thanks for that. Just one quick one on M&A. Typically at this point in the cycle, you find prices going up sellers expectations getting pretty high. I know you did a small deal in the second quarter. Is there much out there that, you know, provides good value at this point in the cycle for you or should we expect the pace of M&A to be pretty slow here?

Well, I think we are seeing greater interest on - would be sellers and we're - while we're always actively engaged in possible deals. We could - the number and the innings in some of these deals is just further along because there's an interest in selling. Interest rate increases is part of - probably part of that inflation, some of those things that affect the seller, they may want to, they want to - and the strengthen the market the market strong. So people want to sell, this is a good time to sell given those other factors. So now I said on our last call, we'd probably do a couple of deals this year. And we're looking to do more than that. That's always subject to change. But the size of the deals we're looking at again, the bigger the harder to conclude, is increasing. And the number of conversations we're having is probably the highest it's been in the last six quarters. So that's always a wait and see kind of thing, we're very active in finding companies that are going to be durable, they're going to be profitable through a cycle. There'll be favorable in terms of working capital drag on revenue, free cash flow, gross margins, EBITDA margins, et cetera. So that's a big focus for us. Each of those needs to be better additions than our overall base business, which is improving substantially. So to me, the rate of interest or the interest by sellers is up there and it's making a lot of conversations and prospects for DNOW.

Great, thanks for taking my questions.

Thanks, Nathan.

Thank you. Ladies and gentlemen, we have 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.

I'd like to thank everyone for calling in today. And we look forward to talking to everyone again in November. Have a good quarter. Thank you.

Thank you, ladies and gentlemen, this concludes today's call. Thank you all for participating in today's conference. This concludes our event, you may now disconnect.