Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Well, thank you, Rob. Good morning, and welcome to DNOW's second quarter 2024 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 primarily 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 U.S. federal securities laws based on limited information as of today, August 7, 2024, 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 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 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 attributable to DNOW Inc. excluding other costs, and diluted earnings per share attributable to DNOW 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 these non-GAAP financial measures to its most comparable GAAP financial measure and 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 of 2024. A replay of today's call will also be available on our website in the next 30 days. We plan to file our 2024 Form 10-Q for the second quarter later today and will also be available on the website. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. Before I talk about the business, I'd like to recognize the perseverance of our employees through the disruption caused by two recent storms, the Derecho thunderstorms in May and the more recent Hurricane Beryl in July. Both storms directly impacted many of our employees, causing widespread loss of power and destruction of personal property. Without hesitation, our DNOW employees selflessly stepped up, extended a helping hand and supported one another and our communities. I'm impressed with the way we came together to help one another in a time of need. This collective response is emblematic of DNOW's culture and brings me a great deal of pride. In that same spirit of teamwork and community, in the first quarter, we joined forces with Whitco Supply, tapping into a talented team with strong leaders and technical expertise who earn deep affection from their customers. Their supply chain design, strength in midstream, world class sales team, and keen focus on customers piqued our interest when we pursued that combination. The Whitco people and culture were a natural fit with how we've transformed DNOW to live and breathe those same cultural attributes. During these last six months, it's remarkable to see the deep esprit de corps and cultural alignment our team share, elevating DNOW to expand our value and reach in the market to help fuel greater success together. In terms of highlights for the quarter, there were many. We produced strong earnings, having grown revenues organically in the second quarter despite headwinds. We grew our legacy midstream business coupled with the onboarding of Whitco, where we have more than doubled our midstream coverage. We are seeing success along our trek to double our energy evolution sales in 2024, a key element of our long-term strategy. We…

Thank you, Dave, and good morning, everyone. Total second quarter 2024 revenue was $633 million, up 12% or $70 million from the first quarter of 2024. EBITDA, excluding other costs or EBITDA for the second quarter was $50 million, or 7.9% of revenue. U.S. revenue for the second quarter 2024 totaled $512 million, a $77 million increase or 18% higher than the first quarter of 2024. Year-over-year U.S. revenue increased $56 million or 12% from the second quarter of 2023. The U.S. sequential revenue increase was driven by the full quarter contribution of Whitco paired with U.S. growth in both Energy Centers and Process Solutions in the quarter. U.S. Energy Centers contributed approximately 74% of total U.S. revenue in the second quarter, and U.S. Process Solutions contributed approximately 26%. In Canada, for the second quarter, revenue totaled $56 million, a decrease of $10 million, or 15% from the first quarter of 2024, as expected due to seasonal breakup. International revenue for the second quarter of 2024 was $65 million, up $3 million, or 5% sequentially, primarily from projects in the Middle East not expected to repeat in the third quarter. Gross margins declined 110 basis points from the first quarter of 2024 to 21.8%, with about half the change attributable to declining steel pipe prices, product and project mix, and competition intensity, and the other half primarily resulting from the impact of acquisition purchase accounting flushing out in the second quarter for inventory step-up to fair market value. Warehousing, selling and administrative, or WSA, for the quarter was $105 million, up $4 million sequentially, primarily related to the Whitco full-quarter contribution, partially offset by approximately $2 million in favorable WSA quarterly impacts not expected in the third quarter. We forecast the third quarter WSA level should approximate $107 million and…

Thank you, Mark. Now, switching to our outlook for the third quarter and full year 2024. In the U.S., we expect activity to be lower sequentially as U.S. operating rigs and completions are expected to be muted due to weak gas prices in addition to customer budget throttling and tentativeness around upcoming U.S. elections. In Canada, we expect growth from the second quarter as more favorable weather patterns afford increased activity. Internationally, we expect activities to be lower sequentially due to project timing. Taken together, we expect DNOW's third quarter sequential revenues to be flat to down 5% from Q2 '24 with EBITDA to approximate 7% of third quarter revenues. And for the full year 2024, revenue could increase in the low-to mid-single-digit percentage range compared to full year 2023, and our 2024 full-year EBITDA percent could approximate 7% to 7.5% of revenue. Free cash flow for 2024 could approach $200 million. We have a legacy of supporting our customers for the past 160 years, and the long-term outlook remains strong as we are positioned to capitalize on market opportunities despite slowing activity advantaged by the solutions we offer today, underwritten by our strong balance sheet. Our priorities are, first, to finance and seize organic growth; second, to execute on strategic and tuck in margin accretive acquisitions; and third, to opportunistically repurchase shares, a program which we intend to complete by year end. We will invest and grow our core market, capture additional revenues from the growth in investments tied to energy evolution, and diversify our customer base by targeting revenue from additional industrial markets while driving efficiencies across our business. And finally, I'd like to close with where we began with our employees. I was fortunate to spend a couple of days in Wyoming at one of our brightest…

[Operator Instructions] Your first question comes from the line of Nathan Jones from Stifel. Your line is open.

Good morning, everyone.

Good morning, Nathan.

Good morning.

I think I'd just like to start off asking a question about, what's changed for you guys over the last six months. We started off the year expecting some low growth, I guess, for the business. And now ex-Whitco, we're kind of looking more at minus 10. I think I know a number of drivers here in terms of what's going on in the market, but maybe you can talk about, what's changed in your view of the market over the last six months and how that played out in terms of your order rates during the year and specifically in the second quarter and into the third quarter.

Okay. That's a good start-off question, Nathan. In terms of what's changed, so far this year, in fact for some time last year, we saw rigs decline much of the year. I think they dropped about 20% in 2023 compared to the prior year, and they continue to drop this year. As you know, that's one of the key barometers ultimately of the revenue opportunity for the company. In parallel to that activity, or those metrics are completions trends, completions have been down for several quarters. And if you recall, over the last four quarters, perhaps not just DNOW, but industry participants have been calling for a bottom for rig count declines and completions, which just simply hasn't occurred yet. So, we've seen further erosion in activity around completions and rig counts. And the current expectations are that may bottom in the second half of the year or early in 2025. So, that gives us pause as to where we invest, how we resource the business, how we manage expenses, and those things. But our view is, we believe, temporarily changed. We think we've got some green shoots going -- or some bright spots going into next year, but that's been the kind of evolution in our thinking.

That was actually going to be my follow-up question. You said that in your answer, and you said in your prepared remarks as well, that you think this is temporary. Can you talk about why you think it's temporary and what those green shoots are?

Well, I think sure, some things we believe are true, or at least being talked about. Oil demand is growing, for one thing. We think that accrues to our benefits. Export LNG opportunities are going to be growing in '25 and 2026. We're well poised to capitalize on that. We think there is a tentativeness or a timidity by some about the U.S. elections. And I think once the decision is made or the U.S. citizens render a verdict, I think we'll see some tentativeness ease. Gas futures are expected to be in the $3 plus range and we'll benefit from that next year. Interest rate cuts we think is -- I think most people think is imminent. That should grease the economy. Steel prices, while they've been declining for many quarters, we're starting to see some manufacturers talk about longer lead times and higher utilization rates. We believe that suggests an improved or less lower product availability and we'll be well poised to run the supply chain better than the average participant out there. Plus, energy evolution. As a key part of our long-term growth strategy, we're gaining traction there. We expect that to grow. We had about $30 million energy evolution sales last year. We expect that could double this year. So those are the things that underpin our confidence going into next year.

Okay. Thanks for taking my questions.

You're welcome.

[Operator Instructions] Your next question comes from the line of Jeff Robertson from Water Tower Research. Your line is open.

Thank you. Dave, on the energy evolution, did you say $60 million of potential revenue in 2024?

I did, Jeff.

And do you have a view on -- based on what you're seeing from projects or customer inquiries, of where that could go in 2025?

We don't right now. I mean, what we think is -- what we're seeing is a significant ramp-up in quotes, which to me is only suggesting more interest around budgeting and those kinds of things. And we're seeing more orders, and the more orders matriculate into sales in 2024, like we said. How that translates, what the timing is going to 2025, I don't think we have a good feel for that quite yet, Jeff.

With respect to revenue per rig, I think you -- revenue per rig was about 15 -- or $1.5 million in 2Q '24. It looks like in the U.S., it was quite strong. Are you seeing market share gains in the U.S.? And with respect to consolidation, do you think as companies get together and maybe adjust their supply chain management practices, that creates market share gains or maybe increased wallet share gains with some of your customers?

Yes. I think the phenomenon that we're slowly beginning to see is as the -- our economy in our oilfield kind of focused space slows down, we're seeing some of our smaller competitors, and they tend to be the competition we fight against day-to-day. They're being a little more careful. They're making some reductions. They're liquidating inventory. And as that's happening, our large customers are consolidating. And only a few distributors can adequately come up with the product requirements and pricing arrangements and geographic breadth to service those consolidated customers. We think that accrues to our benefit. So -- but now there's a period of time, once these big companies come together, where there's a -- there's kind of a tiptoeing around who's going to do what. There tends to be a delay in projects, things get deferred. We believe we're feeling that right now, and we think that will abate in the coming quarters. But -- so we think we're taking market share. We think long term, those customer consolidations work to our benefit, and we want to be poised to capitalize on it.

And lastly, with respect to your midstream footprint -- excuse me, with the Whitco acquisition, are you seeing increased activity as midstream companies look to try to debottleneck the gas network? And I think Waha gas in West Texas was way negative yesterday, and there's obviously a lot of gas that seems to be stranded from a market standpoint. Is that driving activity that you think you'll see in 2025 and 2026 even?

Yes, Jeff. This is Brad. I'll take that. And maybe Dave or Mark can add additional color. But absolutely, we're seeing, certainly with the associated gas produced in the Permian, with Waha prices being well below a $1, some challenges to move that gas to the Gulf Coast market. So we've seen a couple of announcements that's come out recently to help alleviate, the large amount of associated gas there to help with additional takeaway capacity. That's going to take, probably, a year to two years to add additional capacity. And I think the Matterhorn pipeline was delayed a little bit. I think LNG export capacity had some additional delays to be able to grow that, out of the Gulf Coast with delays with Freeport LNG. So, I think over the next, six to 12 months, I think we'll start to see some more relief there. Really, the question is, will the, you know, dry gas basins come back into play and be able to get, some of that either dry gas from the Haynesville to the Gulf Coast markets? And can we get an increased takeaway capacity from the Permian and Eagle Ford to the Gulf Coast markets as well? So what we think long term, demand sets up well, for gas for us to be able to export LNG. And so, DNOW sits in a good position to be able to capitalize on the midstream sector with our legacy business and with our Whitco business. We think we've got many of those basins I've mentioned as well as additional ones covered with our current service model and access to new customers that you mentioned -- that I mentioned earlier with Whitco. Also think that in Canada, where hopefully we'll see some additional relief in LNG out of the West Coast there may be in the next couple of years. So again, long term, I think it sits up well. Short term, I think we're trying to alleviate some congestion and look for additional takeaway capacity to help drive incremental rig count demand tied to natural gas.

Thanks, Brad.

And there are no further questions at this time. Mr. Brad Wise, I'd turn the call back over to you.

Okay. Well, thank you for your questions today and your interest in DNOW, and we look forward to talking to everyone on our third quarter call scheduled for November later this year. With that, I'll turn it back to the operator to conclude our call.

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