Good morning. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Thank you, Jeannie. Good morning, and welcome to DNOW's Second Quarter 2025 Earnings Conference Call. We appreciate you joining us, and thank you for your interest in DNOW. With me today is David Cherechinski, 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 meanings of the U.S. federal securities laws based on limited information as of today, August 6, 2025, 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 maintain -- excuse me, in an effort to provide investors with additional information regarding our results, -- as determined by U.S. GAAP, you'll note we disclose various non-GAAP financial measures in our earnings press releases and other public disclosures. These are non-GAAP financial measures. Earnings before interest, taxes, depreciation and amortization, or EBITDA, excluding other costs, EBITDA, excluding other costs as a percentage of revenue, net income attributable to DNOW Inc., excluding other costs, diluted earnings per share attributable to DNOW Inc. stockholders, excluding other costs and free cash flow. Please refer to a 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 key results and takeaways for the second quarter 2025. A replay of today's call will be available on the site for the next 30 days. Now let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. We have quite a bit to cover from our second quarter results and achievements to the outlook for our business and some updates on the MRC Global transaction. I'd like to start by acknowledging the continued solid execution by our team, driving an exceptional first half of the year despite macroeconomic headwinds. In recent growth years such as 2021 and 2022, U.S. rigs and completions grew on a year-over-year basis, which created more opportunities for targeted growth. However, in this current softer market, achieving growth necessitates greater focus and a concerted effort to identify and execute on the prospects that meet our strategic and financial goals. Our relentless commitment to serving our customers and supplying them the best solutions and fit-for-purpose products from the top manufacturers are instrumental to our success. I am proud of our team's performance, and I'm thankful for their efforts and their desire to win the market. The second quarter of 2025 represents the best second quarter EBITDA results in our public company history at $51 million. This achievement is a result of the steadfast execution by our team, where market activity has actually declined sequentially and year- over-year. And as I stated in our first quarter call, this is important to emphasize, given the misunderstood perception that upstream sector activity alone drives opportunities for DNOW. Revenue for the second quarter was $628 million, up 5% from the first quarter and twice the midpoint of the sequential guidance we gave in May. Gross margins remained resilient at 22.9%, in line with our expectations and better than the full year 2024 average despite being challenged in a more price-sensitive environment. EBITDA for the quarter was $51 million, again, a second quarter company best, up 11% sequentially. EBITDA as a percentage…

Thank you, Dave, and good morning, everyone. Total revenue for the second quarter of 2025 was $628 million, up 5% or $29 million from the first quarter of 2025 at the top end of our guide from our May call. EBITDA, excluding other costs or EBITDA for the second quarter was $51 million or 8.1% of revenue, up $5 million sequentially. The second quarter also marked the 13th consecutive quarter where DNOW has delivered EBITDA at or above the 6.9% level. U.S. revenue for the second quarter of 2025 totaled $528 million, an increase of $54 million or up 11% from the first quarter of 2025. Year-over-year, U.S. revenue increased $16 million or up 3%. U.S. energy centers contributed approximately 72% of total U.S. revenue in the second quarter, and U.S. Process Solutions contributed approximately 28%. In Canada, for the second quarter, revenue totaled $48 million, a decrease of $14 million or 23% from the first quarter of 2025 as seasonality drove sequential revenue lower. Canada's revenue historically declines in the second quarter due to the seasonal breakup period where heavy equipment access to production areas is restricted. International revenue for the second quarter of 2025 was $52 million, down $11 million or 17% sequentially, as expected based on the $15 million first quarter international projects we discussed last quarter, partially offset with increased project activity elsewhere. Overall, DNOW gross margins for the second quarter were 22.9%, down slightly sequentially and up 110 basis points when compared to the second quarter of 2024. Warehousing, selling and administrative, or WSA, for the quarter was $112 million, in line with our expectations from last quarter after considering the more than $3 million second quarter costs incurred related to the announced merger with MRC Global. We anticipate various other costs in future quarters…

Thank you, Mark. Now switching to our outlook for the third quarter. In the U.S., second quarter revenue was higher than expected due to 3Q forecasted projects pulling forward into 2Q. As such, we expect U.S. third quarter revenue to be relatively flat compared to the second quarter as we continue to face sector headwinds impacted by midstream project timing and offset by continued progress in our energy evolution and industrial adjacent market penetration. In Canada, we expect to see a seasonal increase in revenue sequentially coming out of the second quarter breakup. However, we anticipate continued softness in the Canada market, impacted by U.S. trade negotiations, tariff uncertainty and political posturing impacting customer investments. Internationally, we expect sequential top line growth due to increases in project activity. Taken all together, we expect DNOW's third quarter sequential revenues to increase in the low single-digits percentage range from the second quarter. We expect third quarter EBITDA to approach 8% of revenues. We reaffirm our view that full year 2025 revenues will be flat to up in the high single-digit percentage range from 2024 levels and full year 2025 EBITDA could approach 8% of revenue. We are also reaffirming our target of free cash flow in 2025 of $150 million. In closing, I'd like to again recognize and thank our DNOW team for their unyielding focus in serving our customers and the continued execution of our strategy. Their efforts have enabled solid results for the quarter, posting revenues at the top end of our second quarter projections and delivering record-setting second quarter EBITDA. Moving forward, we remain focused on advancing our strategy and planning for the close of our transaction to combine with MRC Global. This is a transformative milestone in the strategic advancement of DNOW, and we are all eager to bring together our teams and pursue growth through an expanded suite of products and services, all to serve a diverse and growing customer base. With that, let's open the call for questions.

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

This is Adam Farley on for Nathan. Maybe starting first with the merger with MRC. Thinking about thinking through the work, what are the most difficult parts of the integration likely to be? How do you manage the risk? And how do you keep your employees focused during this period?

Well, our orientation, Adam, is around bringing the notion to our employees that this flat out is going to make DNOW and MRC Global combined a better company. We've done transformational combinations in our history. And the first cardinal rule is we're going to focus on the customer post close like we are today. It's all about the customer. We're going to align our teams early in the process. everyone focused on external matters, that is managing the supply chain, working very closely with our -- the manufacturers we support, becoming better distributors to the manufacturers we support, focusing on our customers and being a better supplier to them with a broader array of products and solutions with more locations closer to them with a broader array of inventory and simply just a much a company much better able to satisfy customer requirements as they evolve, especially in this consolidation experience we're seeing with our top customers. So the focus is on how do we grow the business going forward. That's the focus. Having done this before, you really have to -- the focus must be an external one and it must be focused on the supply chain and our customers and getting everyone pumped about the future. We've got a high-caliber team that's focused on the integration, and we can talk more about that in a bit.

That's good color. Dave, maybe thinking about '25 guidance, is it safe to assume the year is heading towards maybe the top half of the current guidance? And do you have any color on if customers are telling you anything about possible budget exhaustion in the fourth quarter? Just any detail on the back half.

Yes. In the answer to the first part of your question, I wouldn't bias the guide towards the top end. I think it's safer to be in the middle of that range. We've got an exciting second half of the year planned out, but we'll see some of our customers with budget exhaustion, most notably in the fourth quarter, and that's factored in there. In terms of -- what was the second part of your question? I'm sorry, Adam.

Yes. What are your assumptions around fourth quarter seasonality and budget exhaustion?

Yes. I think it's going to be in line with what we normally experience. There's nothing to say it would be more pronounced. I think it will be pretty much consistent in that 5% range we've experienced over the last several years. I think that's probably a good bet for the fourth quarter.

Your next question comes from the line of Jeff Robertson with Water Tower Research.

Dave, in your comments with respect to the MRC combination, you said you've had some discussions with vendors and customers. And I know the $70 million of estimated cost synergies is mostly related to corporate costs. Are you seeing opportunities at this early stage that you can drive some synergies with vendors and with customers that ultimately add to those costs and accretion over time?

Yes. We spent a good deal of time on estimating those synergies. And I'm not going to raise the number. It's going to take a lot of work to get there. We've just kicked off a joint MRC Global DNOW team with high-caliber talent from both organizations. both groups having deep understanding of the respective organizations and the focus is on people and talent and growth. Tomorrow, once we close the deal, we want to be focused on growing our business and being a better distributor to our customers, like I said. So my focus is on growth and the promise of what this combination can mean really not from combining locations is certainly not considering how that will transpire as we go through this integration process. So the focus remains on growth and the promise of the combination rather than focusing on field consolidations where we're going to realize most of the benefits from the complementary nature of each of the firms.

As you look at the combined company, Dave, are you seeing or do you expect that with less exposure to upstream than DNOW stand- alone has, do you see that as an increased visibility in the future earnings power of the company as you're less tied to the drilling and completion capital cycles?

Well, it certainly will make the combined company less focused on upstream in particular. But we still see that as an important part of our business. We want to grow our position in upstream. But I think the diversification is the real opportunity here. MRC has built very strong end markets where we play such a small role. We can use our complementary locations, sales teams, non-crossover customer access to grow both sides of the businesses. So I think the real opportunity there is to rely on cross-selling to grow the company.

And then lastly, do you anticipate a lot of that coming from electrification in terms of AI and just other build-out of the grid? I think that's part of the strength of MRC was exposure to the gas utilities and products markets.

Yes. Brad, do you want to hit that a little bit?

Jeff. Yes, I think Dave in his prepared remarks, identified a number of growing industrial markets, electrification, of course, as we've seen many of the OFS sector as well as other providers work to move away from fossil fuels on the electrification side. Of course, AI data centers is a very exciting space. I think the combination of our companies going forward would just bring more capabilities around that area. I know we highlighted a successful win selling some valves to data center project. I think the prior quarter, we highlighted winning feed gas pipe valves and fittings on a feed gas line to a power plant that's feeding a data center. So we're starting to see more and more opportunities in our quotations and our business development efforts, really focusing on those growing end markets that we identified. Certainly, midstream had tremendous growth there, approximating 27% of DNOW revenue this quarter. And then as you look further downstream with opportunities with LNG export, we're seeing opportunities there. We're seeing, as I mentioned, opportunities with data center, data center construction. And then the power generation side on that, too, and what that means for the future of natural gas demand as some analysts are projecting natural gas operating rigs to grow potentially here second half, certainly into 2026. So that certainly helps us on the upstream side as well. So we're excited about the future and what these -- what the combination of these 2 companies can bring to many of these diversified industrial markets.

[Operator Instructions]. And your next question comes from the line of Blake McLean with Daniel Energy Partners.

I appreciate all the color this morning. And I appreciate really that last series of questions and answers around kind of the total end market portfolio and the opportunities and threats there. Maybe just like expanding on that a little bit, how do you think about how the mix of NewCo sort of evolves over the next 1, 2, 3 years as it relates to those sort of total end market -- that portfolio of total end markets?

Well, thank you for the question. Yes, I think in our previous merger call announcement, we talked about what combinedCo end market would look like from an upstream, roughly about $5.3 billion in revenue, about 41% of that upstream, about 21% of that midstream, about 17% gas utilities -- or 21% gas utilities and the balance downstream industrial. So we're excited about certainly increased diversification there, I think, to offset some of the cyclicality in the upstream market, certainly that we're accustomed to over the many years here at DNOW. I would say moving forward, many of those Industrial markets are projected to grow with various degrees of CAGRs. Certainly, the gas utilities sector, I believe, is increasingly going through modernization and replacement as population grows and demand increases there. AI, the demand for more gigawatts tied to AI development and data center construction, that's an exciting area, I think, for NewCo, really with the exposure that both companies have traditionally had and are gaining because it's a new growth area, both on the power gen side, on the general contractor side with the construction, with the operators and some of these hyperscalers like Meta, Microsoft and others, we're starting to see more activity and build relationships there and then also continued build-out of midstream infrastructure to really satisfy that, call it, 5 9s of reliability for power demand for those data centers. And then really exciting is LNG. We commented on a couple of wins there. We've seen our backlog tied to LNG continually increase here quarter-over-quarter. We hope to get some of those across the finish line over the next 4 to 6 quarters here. They are long-cycle projects as U.S. and Western Canadian companies look to expand their export liquefaction terminals and to be able to capture demand from Europe and Asia to help feed those markets on a global LNG basis. So those are some of the exciting opportunities we have looking forward. And I think NewCo and its combination with our combined sales force, our success prior success with customers and our supplier relationships can present an exciting opportunity going forward in the market.

Appreciate that color. I mean we would agree that the growth profile in a lot of those places just feels different, right? One more, just kind of maybe quick follow-up. Could you talk a little bit about impact from tariffs in the back half of the year and how you guys are sort of thinking about that and navigating those challenges in this environment?

Yes, I'll take that one. So we've seen some positive impact from tariffs from a product cost perspective. So we've seen product costs go up a little bit. We've seen that from tariffs. We've also seen it from general inflation, which we began to experience before the tariff impacts. We're seeing most of our sales growth coming through volume, not price. So about 80% of our sales growth has come from selling more products versus the increase in price. So we haven't really seen much price impact from the tariffs quite yet. And then there's been a kind of a governor on margin impacts due to tariffs because there's hyper-intensive competition out there, especially as we're in kind of a slower market in some of the end markets. But one thing I want to say about that is despite the tariffs, despite supply chain uncertainty, despite some political events that complicate managing the supply chain, we expect and our forecast suggests this will be our fifth consecutive year of growth in an environment where the market has contracted 3 consecutive years. So we're making gains in energy evolution in the adjacent markets where we've been pursuing growth. We're able to fill some of those market activity declines by expanding our focus often with the same customers that we're doing upstream and midstream business with. So we're growing our business organically. We're making smart acquisitions. We're integrating those businesses smartly. And we want to grow all the end markets in the stand-alone DNOW and in NewCo. We want to grow our business, and we've been very successful at doing so. We talked about the second quarter having the highest EBITDA second quarter in our history. That's something to say after 3 years of market decline. So we're excited about where we…

Your next question comes from the line of Jeff Robertson with Water Tower Research.

Dave, just as a follow-up in the DNOW second quarter, I think you said that's the highest adjusted EBITDA, I think maybe since being a public company. But the EBITDA margin was 8.1%, which is the best it's been since the first quarter of 2023. And I know that was above expectations. Were there some things in the quarter that drove that outperformance?

Well, I think the biggest driver was growth in midstream. And we've talked about this with you, Jeff, and on these public calls before. midstream business tends to have lower gross margins because the order sizes tend to be much larger, but the cost to service that activity is lower as well. In fact, you can see midstream activity with greater fall-through at the earnings line. So I think the biggest driver in improved earnings and for us able to have our best second quarter EBITDA and above 8% EBITDA performance in the quarter was largely driven by growth in midstream, and we're very excited about midstream for the second half of the year or for third quarter for sure, and then we'll see some tailing off in the fourth quarter like we discussed.

Thank you. That concludes the question-and-answer session of today's call. Mr. Brad Wise, I turn the call back over to you for final remarks.

Well, thank you, everyone, for joining us today and your interest in DNOW. We look forward to discussing our third quarter 2025 results on our next earnings conference call in November. Hope everyone has a wonderful Wednesday. And with that, we'll turn it back to the operator to conclude the call.

Thank you for joining today's conference call. You may now disconnect.