Hello, good morning. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Thank you, Jeremy. Good morning and welcome to DNOW's third quarter 2023 earnings conference call. We appreciate you joining us and thank you for your interest in DNOW. With me today is David Cherechinsky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate under the DNOW brand, which is also our New York Stock Exchange ticker symbol. Please note that some of the statements we make during this call, including 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 US federal securities laws based on limited information as of today, November 2nd, 2023, 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 DNOW has on file with the US Securities and Exchange Commission for 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 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 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 attributable to NOW Inc., excluding other costs, and diluted earnings per share attributable to NOW Inc., excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. Please refer to a reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure and the supplemental information available at the end of their earnings release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the third quarter of 2023. A replay of today's call will be available on the site for the next 30 days. We plan to file our 2023 Form 10-Q for the third quarter today and it will also be available on our website. Now, let me turn the call over to Dave.

Thanks, Brad, and good morning, everyone. The nine months ended September 30, 2023 represent our best earnings performance for the first three quarters in a year since being a public company. In a strong but arguably smaller market this year versus last year, in a period without the pricing propulsion due to product scarcity we enjoyed in 2022, our employees defied gravity again. Our teams produced a notable revenue resilience, giving me great comfort that the singular focus on our customers continues to pay off and accrue to the long-term benefit of our company and its shareholders. Despite North America rig counts being up just around 1% when compared to the first three quarters of 2022, our year-to-date revenues for the first three quarters of 2023 are up 11% in that comparative period. In a business where the most important defining feature is its people, these results exemplify, in fact, leave me no doubt that DNOW enjoys having the best professional women and men in our industry and our customers and shareholders benefit from that distinction. While there are headwinds, we've adjusted our sales to harness the wind efficiently and productively as we navigate the fourth quarter, where we expect a seasonal slowdown as some customers have overspent their annual budget in the first half of the year, with the impact showing up in the third and fourth quarters. For the third quarter 2023, we generated $588 million in revenue, up 2% compared to the same period in 2022. Sequentially revenue declined $6 million or 1%. The US represents 75% of our revenue. For the third quarter, sequential US revenues were resilient, down 2% despite the US rig count decline of 10% during the quarter. Many believe we are approaching the bottom, both in terms of market activity as reported…

Thank you, Dave, and good morning, everyone. Total third quarter 2023 revenue was $588 million, down $6 million or 1% from the second quarter of 2023. On a year-over-year basis, third quarter 2023 revenue was up $11 million or 2%. EBITDA excluding other costs or EBITDA for the third quarter was $46 million, or 7.8% of revenue. And year-to-date 2023 EBITDA was $140 million, or 7.9% of revenue. The US revenue for the third quarter 2023 totaled $448 million, a decrease of $8 million, or 2% from the second quarter of 2023. In Canada, for the third quarter, revenue totaled $68 million, an increase of $2 million or 3% from the second quarter of 2023. International revenue for the third quarter of 2023 was $72 million, flat sequentially and up $16 million or 29% when compared to the third quarter of 2022. Gross margins for the third quarter were 22.8% or up 20 basis points sequentially. Warehousing, selling and administrative or WSA for the quarter was $97 million or $1 million lower sequentially. In the third quarter, we reported $7 million of depreciation and amortization expense. Moving to operating profit by geographic segments. In the third quarter, the US delivered $29 million in operating profit, while the Canadian and international segments delivered operating profit of $6 million and $2 million respectively. Moving to income taxes, the effective tax rate for the three months ended September 30, 2023, was 5.4% on a GAAP basis. I remind you, this is the effective tax rate that is calculated on a GAAP basis from the face of the income statement and is below the typically expected tax rate at these earnings levels due to the income tax expense provision on the income statement, which includes a favorable tax benefit from the changes in the…

Thank you, Mark. Now switching to our outlook for the fourth quarter of 2023. In the US and Canada, we expect revenue to be sequentially lower due to fewer business days, more holidays, and customer budget exhaustion. In the international, we expect activity to be relatively flat sequentially. Rounding out our full year 2023 versus 2022, we expect full year revenue growth of approximately 8%, at the low-end of our 8% to 12% guidance that we set on our February call, despite US rig counts declining every month this year, driving the removal of more than 150 US rigs since year-end 2022. We expect full-year EBITDA to approximate 2022 absolute EBITDA dollar levels. But unlike 2022, where DNOW had breakeven cash flow from operations and free cash flow consumption of $9 million, in 2023 we could generate approximately $120 million in cash from operations or $100 million in full year 2023 free cash flow. I want to close with an important update regarding our brand. We will be transitioning away from the use of DistributionNOW, a DistributionNOW naming convention, and we will be known as DNOW going forward. DNOW is already the most consistently referred to name for our company, and the name we will align around going forward. The decision to amplify the DNOW brand is rooted in our commitment to distinguish our company as a valued, solutions-based product and service provider centered around our ethos, inspire one another, delight the customer, and fuel the future. A refreshed brand will help us communicate our vision more effectively, fostering a sense of unity and purpose. We will continue to support our valuable affiliated brands, for example, TS&M, Odessa Pumps, EcoVapor, McLean, Power Service, Flex Flow, and Dura. I am confident that this branding change will support us for even greater…

Perfect, Thank you. [Operator Instructions] Our first question comes from the line of Nathan Jones from Stifel. Nathan, please go ahead.

Good morning, everyone.

Good morning, Nathan.

Good morning.

I jumped on late, so I apologize if I asked a question that you've already answered. I just want to start with the expectations for rig growth in 2024. Can you talk about what intelligence you have for that outlook, what customers are saying to you in terms of their capital spending plans in 2024? I know we should get some of those budgets here over the next month or two, but just any information you have on early looks into that kind of thing, that gives you confidence that you're going to see growth in rig counts in 2024?

Well, I think my premise is we'll see growth from where we're at today. So joint contractors, some of them are saying they're going to add rigs. There is a lot of speculation that we're at a low point in rig count and that rigs will be added back at some level. So there's that. So I expect some growth from where we're at. And then I'm comforted by the fact that we've been able to retain revenues even though we've seen a pretty strident decline in US rigs during the year, which is where we experience about 75% of our revenue. So I believe we've been -- we have a strong market position that we've gained some share in this meantime, that the market is ‘bottoming,’ expected to grow from here. And then we're real focused on our, what we call our energy evolution strategy, we're focused on carbon capture and renewable natural gas and adjacencies in our space where we could sell pumps into other markets like some of which I talked about on the call and then M&A. So growth from where we're at, strength in retaining revenues even in a declining or shrinking market effectively in the United States are breadbasket. Pursuing adjacencies and carbon capture and new businesses, which is a big focus for us for the last couple of years. And then M&A, which to me is kind of a swing vote in achieving some meaningful growth in -- going into the new year.

I guess my follow-up is on M&A. I mean, your stock price is trading at a pretty low multiple, pretty low multiple of EBITDA, pretty low multiple of free cash flow. How do you look at the balance between, I know strategically you guys are looking to do M&A. With the stock trading at these multiples, it's pretty hard to find a creative deal that are accreted to the share price immediately versus repurchasing your own stock, which doesn't have the same strategic value, but you're getting company you know very well at pretty low price?

Yeah, I think that's a great point. So three to five years ago, we had a much heftier multiple and we had more currency in that multiple to do deals at better prices. The fact is, the sellers recognized the kind of market we're in the energy space, and we recognized that. We're going to try to do deals within that current trading multiple. We may, of course, consider the revenue synergies that would come from the deal, any cost synergies that might come, that will be factored in as well. But we do have a narrower trading range that does limit the M&A opportunities. But we've done some smaller but really good deals in the last couple years. Now we're looking at bigger deals, and we're having some mutual interest. So I agree with your sentiment. I think we understand that, and I think sellers do as well. And we're going to try to take advantage of that appreciation for where we're at in the market.

Okay, it's good to know that you're considering that as we go forward. Thanks for taking my questions.

Thank you, Nathan.

All right, our next question comes from the line of Cole Couzens from Stephens. Cole, please go ahead.

Hey, guys, thanks for taking my questions.

You're welcome. Good morning, Cole.

Morning, Cole.

Can you guys talk through the gross margin or OpEx dynamics as we enter into Q4? I think on my math, the implied 4Q is down pretty meaningfully sequentially. And then how are you guys thinking about margins as we approach 2024 and maybe some initiatives that DNOW is driving to support structurally higher gross margins longer term?

Okay, I'll speak to the gross margin and maybe Mark will chime in about OpEx or WSA. So we said on our last call that we expect a little improvement in gross margins, suggesting that we're kind of at maybe a normalized run rate in the second and third quarters of 2023. And we said we'd get about a 20 basis points increase in gross margins in the third quarter and we achieved that. So we feel like this is kind of a good normalized level for us right now and maybe a good starting point for 2024. Of course, we're always focused on high-grading our businesses, focused on higher margin product lines, businesses, locations, M&A opportunities, et cetera, with the idea of growing those gross margins over time, which we've been very successful in doing over the last several years. So that's kind of a starting point for gross margins. In terms of SG&A, Mark, I don't know if you want to add any color, but we -- WSA, but we consider it to be pretty flat, but you want to give some comments on that?

Yeah, absolutely. I think the -- our ability in the third quarter to hold WSA relatively flat, the expectation is that should probably be a good number for the fourth quarter in that 2Q, 3Q range. Nothing else to add on the margin side outside, kind of defying that margin decline that we were having over the past few quarters, being able to arrest that and show growth in gross margin this quarter gives us confidence into that plateauing and being able to continue to optimize that margin going forward long term.

Awesome, thanks. And then higher level kind of on the energy evolution topic, can you guys talk through what customer conversations look like and kind of going forward, are these wins going to be more so with existing customers or potentially with new customers? And at this point in time, what percent of revenue mix comes from those energy evolution projects? Thanks.

I'll start on that, Brad. So I think for more of our oil and gas opportunities, those are going to come from our existing customers, our biggest customers who are investing heavily in the energy transition or the new energy or energy evolution as we call it. So I think the oil and gas oriented projects, opportunities, will be with existing customers. And with the new -- some of our big growth in the second half of this year is happening in the R&G space, primarily through our EcoVapor acquisition. Those are new customers, or at least new customers to DNOW. And some of that is new customers to EcoVapor as well. So outside of oil and gas, we'll see some of that activity happening, or most of that activity happening with new customers. Brad, is there anything you want to add to that to answer Cole's question?

Yeah, I'll just add that, the projects that we've called out on our prepared remarks both, the last -- in 2Q and this quarter have been with existing customers and really existing product lines that we carry predominantly in our inventory. So it's a nice extension of a growing end market that we're able to service with our existing infrastructure and the current investment in working capital that we have today. And we're tracking a number of projects, Cole, and every month, every quarter that tracking matrix we have grows. So we're seeing market expansion here as our current customers invest more in the energy evolution, looking at decarbonization and whether it's through carbon capture or whether it's through just reduction of current emissions that they have. We've been experiencing that for a number of quarters here where kind of the low hanging fruit is to remove the methane emissions and go to more air pneumatic systems in the oil and gas operating field. But now we're starting to see much bigger projects that we're tracking, specifically around more infrastructure tied to carbon capture, CO2 pipelines, sequestration. So we're excited about the future, certainly about the next few years of where that market's going and the growth opportunity not only in the US but also internationally as well.

Awesome, thanks. That's great color. I'll turn it back.

Thanks, Cole.

All right, thank you. [Operator Instructions] Our next question comes from the line of Jeff Robertson from Water Tower Research. Jeff, please go ahead.

Thank you. Good morning.

Good morning, Jeff.

Dave, can you talk -- you all have talked before about the line of sight you have on well pad construction type projects. When you look at R&G and CCS, do you have a longer line of sight from customers over what kind of business you might be able to generate in those areas in 2024 and even 2025 as construction starts to pick up and people take a long-term view of those opportunities?

Brad?

Yeah, Jeff, good morning. We talked a lot about the well site. That's certainly been DNOW’s kind of bread and butter. We provide all the pipe, valves and fittings for the gathering systems, and also the fabricated equipment and pump packages to separate oil, gas and produce water, and move those to the midstream sector. As part of looking at carbon capture, we've been involved with a number of our customers as they use carbon dioxide, CO2, for enhanced oil recovery. We've been involved in some of those projects. Now we're starting to see other technologies come to market like direct air capture and we partake in some of those projects. I think we're kind of early here and the cycle is really kind of looking at a standardized footprint going forward. I think our customers are still doing a lot of engineering and FID work in this area. So I think that remains to be seen. But what we like about it is it's our current customers that we currently have agreements with, terms with. We have the technical aptitude to support our customers as they go through this process. So we really like that aspect about the CCUS type market. And then the R&G market, we -- previously we have provided pipe, valves and fittings as players move into that space to connect to different farm systems, whether it's dairy or swine farms, to a gas processing facility to process that gas, to be able to sell that product to the midstream. And then with our EcoVapor acquisition December ‘22, it gave us a technical solution to sell into that end market. And so we feel like that's unlocking more opportunities for us, not only in the vast number of RNG sites that are currently being explored and developed, but also additional products that we might be able to sell into the RNG as we get more experience with that gas processing side, as well as the standard pipe, valves and fittings that go along with it. So we like those two sectors. It's a great growth environment for us looking into the future and we're looking to expand where we can in both of those end markets.

Are there acquisition opportunities that would support the Process Solutions business that would give you more penetration into those types of opportunities?

Jeff, yeah, I would say there are. We've looked at a few deals. They range from technology to equipment packages that are -- that could append or be sold in connection with the current technical and engineering capability that we have. And then we also look for, certainly one of our acquisition strategies is to look for more exclusivity of territory or manufacture of products in a certain geography like we do on our pump package and our pump lines. So we're always looking for accretive margins on M&A. We're looking for some exclusivity where we have dedicated opportunity to sell products into certain geographies or certain end markets. So the answer is yes.

And last question, Mark. You talked about WSA, which has been running just shy of $100 million for the last couple of quarters. As you look at the 2024 business, is that -- do you think that's a good number for as you look out into next year -- [per] (ph) quarter?

Yeah, I think a lot of it, Jeff, will be dependent on the trajectory of growth into 2024. I can tell you we're committed to ensuring that we maximize the productivity of that WSA line. And so being able to hold it, $97 million this quarter down from $98 million -- the $97 million, $98 million looks good into the fourth quarter. Really look at what it could be going forward depending on the trajectory of growth next year. Certainly willing to invest in people and facilities and things that grow that middle line if we're going to achieve the top line accretion that we want. So a little early, but in February we should have a better view with you there. Thanks, Jeff.

Thank you.

All right. There are no further questions at this time. Mr. Brad Wise, I turn the call back over to you.

Okay, thank you everyone for your questions today and your interest in DNOW. We look forward to talking to everyone on the fourth quarter and full year 2023 earnings conference call in February of next year. Have a great day and I'll turn it back to the operator to concludes the call.

Perfect. This concludes today's conference call. You may disconnect.