Good morning and welcome to the First Quarter 2020 Earnings Conference. My name is Brandon and I'll 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. I will now turn the call over to Senior Vice President and Chief Financial Officer, Dave Cherechinsky. You may begin, sir.

Good morning and welcome to the NOW Inc. First Quarter 2020 Earnings Conference Call. We appreciate you joining us and thank you for your interest in NOW Inc. With me today is Dick Alario, Interim Chief Executive Officer. NOW Inc. operates 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. Before we begin this discussion on financial results for the first quarter 2020, please note that some of the statements we make during this call, including the answers 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 that 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 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.distributionnow.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 EPS, excluding other costs. Each excludes the impact of certain other costs and therefore has not been calculated in accordance with GAAP. A reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release. As of this morning, the Investor Relations section of our website contains the 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 2020 Form 10-Q today and it will also be available on our website. Now, let me turn the call over to Dick.

Thanks, Dave. Good morning everyone and welcome. We won’t spend a lot of time in our prepared remarks today talking about the macro environment for two reasons. One, we're reporting fairly late in the quarterly earning cycle and thus, we know that everyone on the call is well apprised of what's happened. Secondly, there are a number of things we're doing that are rather unique at DNOW, which even as we deal with the market difficulties, will make the company much better equipped to improve its market position, and so we think it’s more important to spend our time on those. As I speak with you today, I want to begin by thanking DistributionNOW's talented and dedicated employees for all they have done to assure the business continuity that our customers and shareholders expect. As importantly they've done this while keeping DNOW's ESG goals at the top of mind. We've taken the right steps to protect our employees' health and safety. Alongside that, one of the crisis business rules that I put into place as market conditions deteriorated so quickly in February is to continue to show DNOW's social responsibility as a company, and I've seen many examples of that over the last couple of months. And with regard to governance, we've included a proposal in our proxy to declassify our Board, which we're recommending. So, against the more visible and increasingly important backdrop of ESG, I'm just as proud of how our company has been able to keep our ESG focus intact, prioritizing sustainability as we've made the hard decisions and taken difficult steps. As all of you know very well, the oil and gas industry is dealing with an unprecedented shockwave emanating from the COVID-19 global pandemic and the collapse in oil prices. Because we're an essential service to the energy industry, we've remained open for business while operating within various federal, state, provincial, and local government guidelines. In response to the pandemic, we implemented our business continuity plan early to ensure that we could safely and effectively protect our employees, support our customers, and manage our global supply chain to keep products available. During this time, we worked in lockstep with our global supplier network to ensure minimal disruption and maintain access to the products our customers require. Our sales organization remains connected to our customers, leveraging a variety of digital meeting platforms and technology-driven information-sharing tools to provide updates on impacts that the COVID-19 pandemic was having on products that we provide ranging from imports from market areas like China, Italy, and other international sourcing locations to domestic sources working under similar conditions. Again, I'm very proud of the way our leadership, management, and employees responded early and quickly in addressing the rapidly changing environment around this. In a situation like this with a multitude of quickly evolving dynamics, we operate on targets that do not move, protect liquidity, transform the cost structure to one that's properly sized for the looming market conditions, and position DNOW for maximizing shareholder returns in the long-term. Fortunately, our balance sheet with zero debt and ample liquidity affords us the ability to carefully and prudently manage our company through these times. Make no mistake, we're making tough decisions and DNOW will emerge from this downturn a much leaner, transformed company positioned to take advantage of the next market upswing based on a much lower cost structure, able to scale quickly to meet market demands. So, now let me touch on some results from the first quarter. Revenue was $604 million, a sequential decline of $35 million or 5%. U.S. revenue was $441 million, a sequential decline of $27 million or 6% on lower activity, with rig count sequentially down 4% and average completions activity sequentially down 12% according to the EIA. Canadian revenue was $78 million, a sequential increase of $2 million or 3%; and International revenue was $85 million, a sequential decline of $10 million or 11%. In our business segments, for our U.S. business, U.S. Energy Centers revenue was essentially flat. It's mostly comprised of wellhead hookups, tank battery construction, artificial lift, and midstream gathering and infrastructure build-outs. We're actively engaged in midstream crude oil and liquid transfer, as well as water infrastructure projects across several of our businesses, bundling and cross-selling our U.S. process solution products. Our steel pipe revenue was sequentially flat, with improving orders for our coiled line pipe for gas lift and water transfer applications. Drilling revenue declined as expected with rig count reductions. For our U.S. Supply Chain Services business, revenue declined 15% sequentially resulting from lower activity with our major SCS energy E&P partners, while our downstream and industrial activity was slightly lower impacted by increased sales of safety and PPE supplies. This was offset by several plant turnarounds scheduled for late February and early March that were delayed due to the COVID-19 pandemic. Approximately two-thirds of the SCS revenue decline is associated with the sale of a business that we announced during our last call and that closed at the end of January. Our U.S. Process Solution business revenue was down 3% on lower upstream completions and project activity, partially offset by revenue from the midstream, downstream refining, and mining sectors. We continue to see fairly steady activity in midstream pipeline and gas fractionation as well as water disposal projects from customers as funded projects started before the pandemic. However, we anticipate further softening once these projects are completed. In our Canadian business, early quarterly activity was up sequentially along with rig count and well spuds coming out of the fourth quarter load. January and February sales were as expected; however, the activity declined in mid-March, dampening any sequential momentum in the quarter. Revenue was a mix between upstream and midstream projects, with the Viking play and unconventional oilsands markets delivering increased activity, while Cardium and Southern Alberta plays experienced lower activity, followed by relative flatness in Saskatchewan and Manitoba. For International business, we witnessed areas of sequential decline in revenue, with softness in the Middle East and Asia. Our decline was predominantly due to the closure of two branches in the U.K. and the sale of that business which had operations in the Philippines, Mexico, and the U.K., combined with the effects of early lockdown manufacturing facilities in China which affected shipments headed for the Middle East and Asia. Our supply chain team continues to actively monitor and manage our product availability from global sources during this time. Product availability and delivery continue to be efficient; however, production levels around the world are declining, affected by reduced demand levels and the need to keep employees safe. DNOW has a global, flexible supply chain that is rooted in longstanding relationships with our key suppliers. As a leading distributor to the oil and gas markets, we have competitive access to an inventory of both domestic and import manufacturers with very strong supply networks. In the current environment, we've worked closely with our customers to provide innovative and meaningful cost reduction initiatives in the form of product standardization, lower cost alternatives, inventory management solutions, and surplus items management and redeployment. When coupled with our digital tools in the form of asset management, procurement, and approval workflow that yield higher operating efficiencies, the result is lower costs and improvements to our customer's supply chain and operational efficiencies. A couple of examples: for one major operator over several months, we've reduced their inventory, reduced their core items by outspend, redeployed their surplus material, and delivered labor cost savings. For another customer, we were able to improve the cash conversion cycle while performing goods receipt and issuing material at the well site, therefore enabling our customer to invoice their partners in a timely manner. These are just two examples of how we're offering structural cost savings to our customers that can be realized and leveraged using DNOW's integrated approach to supply chain management, combined with our digital tools. In the last quarter's call, we announced a significant cost transformation initiative that the company had begun in late 2019. Coupled that mindset with unprecedented activity decline, and as a result, we've embarked now on a structural transformation. This takes several forms. First, we're executing on significant personnel cost reductions to balance our labor force and overhead with decreasing activity. Second, we're restructuring organizationally and making system infrastructure changes. And third, we're deploying technology to further reduce costs. On cost reduction with streamlined and reduced headcount, expenses, and discretionary spending; on structural and infrastructure changes, with closed and consolidated facilities, removed management layers in North America, and renegotiated prices and terms with suppliers. I want to be very clear. The goal for structural transformation is to ensure that the three large steps that we're taking are sustainable in nature as we navigate the level of uncertainty into the future. We'll provide more details on our cost structure transformation later in this call. Under technology, we will continue to invest in technology that reduces our operating costs and maximizes value for our customers. Let me provide an update on two key areas. In April, we completed the migration of our SAP backend database to Suite on HANA. The completion of this project caused no service interruption for our customers and increases our ERP platform performance leading to an overall increase in system capability and reduced IT service costs. Also, our investment in upgrading our order management system with the benefits scheduled to be realized later this year will provide improved response time to customer inquiries, better customer service, and increased productivity per employee. Staying in this technology space, I'd like to shift the focus to digitalization opportunities. There's no doubt in today's environment and in the future, digitalization is changing the way our industry conducts business. For DNOW, how we digitally engage our customers today and in the future creation of new revenue streams, touches new markets as to customer value creation and increases customer intimacy. DNOW has put a stake in the ground and it will position itself as a leader in the digitalization supply chain market for the energy industry. Last quarter I introduced our DigitalNOW brand and our Board's commitment to invest capital in this space to develop, deploy, and market our digital tools to enhance the way we conduct business as part of a unified commerce platform. As an all top priority program, leadership and commitment are the differential factors for success. Therefore, we've assembled a dedicated and focused team, led full-time now by our former most senior operations executive to deliver on our DigitalNOW objectives. As of this quarter, the DigitalNOW team has already expanded our European e-commerce footprint by creating new e-commerce storefronts in Norway and the Netherlands. This will enable new and complementary customer-facing opportunities and further expose DNOW's user-friendly ordering capabilities and expanded product offerings to the international market as a compliment to our current U.S., Canadian, U.K., and Australian online storefronts. Also, one area that we're really excited about is combining our distribution products, technology, and IoT capabilities with our engineering and fabrication business. We'll be able to make DNOW the digital onsite solution provider of choice for operators and service companies to track and manage the repair, maintenance, and replacement of discrete components, allowing our customers to maximize the return on their assets. Now, I'm going to turn the call back over to Dave to talk about our quarterly financials and our structural transformation initiative.

Thanks, Dick. Due to the uncertainty around global events, the COVID-19 pandemic and the associated significant reduction in oil prices, we will not be providing revenue guidance for the second quarter or for the full year 2020. For the first quarter of 2020, we generated $604 million in revenue, down $181 million or 23% compared to the same period in 2019. Sequentially, revenue declined $35 million or 5%, with half of the decline attributable to the sale of a business at the end of January. Most of the quarter, revenues were tracking as expected. Market conditions deteriorated in the second half of March and have continued to decline in April, with revenues down in April one-third or 33% versus the first quarter monthly average. U.S. rigs were stable for the first 11 weeks of the first quarter, averaging 791, but since then have dropped by 384 rigs in the last seven weeks. In the U.S. segment, first quarter 2020 revenues were $441 million, down $159 million or 27% from the first quarter of 2019. Excluding the revenue impact from the January divestiture, U.S. revenue changes were equal to rig count changes sequentially and year-over-year. U.S. Energy Centers contributed 50%, U.S. Supply Chain Services 28%, and U.S. Process Solutions 22% of first quarter 2020 U.S. revenue. In the Canadian segment, first quarter 2020 revenues were $78 million, down $8 million or 9% from a year ago, up $2 million sequentially. In the International segment, first quarter 2020 revenues were $85 million, down $14 million or 14% from a year ago, which reflects reduced activity in the U.K. due to location closures in the fourth quarter of 2019, project declines, the sale of a business in January, and then approximately $2 million unfavorable impact due to foreign exchange fluctuations. International revenues were down $10 million sequentially. In the first quarter, gross margins were 19.4%, a 20 basis points decline sequentially and a 70 basis points decline compared to the first quarter of last year. Note that gross margin sequential declines were not the result of diminished product margins, but were caused by $9 million in inventory charges in the period related to exiting some product lines and locations that do not align with our future strategy in this market. In fact, gross margins improved sequentially and year-over-year when removing inventory charges in the comparable periods. Our emphasis on higher margin product lines, intentional avoidance of lower margin orders and products, and the deployment of technology to maximize both water win rates and margins muted the impact of depletion. Note that we have historically experienced inventory charges to be higher than normal in periods where revenues declined quickly. Warehousing, selling and administrative expenses, or WSA, was $130 million or down $4 million sequentially and down $5 million from the first quarter of 2019. Note that when excluding $4 million in bad debt expense and $5 million in other costs incurred in 1Q 2020, our WSA would have been $121 million. Moving onto operating margins. The U.S. generated operating losses of $204 million, a decline of $223 million when compared to the correspondent period of 2019, primarily due to the $188 million impairment charges and a decline in revenue, partially offset by reduced operating expenses. Canadian operating loss was $58 million, including a $60 million impairment charge or down $60 million when compared to the corresponding period of 2019. International operating profit was $71 million, including a $72 million impairment charge or down $73 million when compared to 1Q 2019. Net loss for the first quarter was $331 million or $3.03 per diluted share. Other costs in 1Q 2020 totaled $325 million pretax, which includes $5 million related to separation and transaction-related expenses and $320 million in non-cash charges related to goodwill, intangibles, and long-lived assets due to the deterioration in global market conditions. The impairment charges were primarily the result of near-term downward revisions to forecasted rig, the customer spend activity, which we incorporated into our outlook and forecasted results of operations. Additionally, the impact of COVID-19 and market uncertainty was considered in our model. We expect depreciation and amortization expense to decrease from $10 million in first quarter to approximately $7 million in the second quarter as a result of the intangible impairments in Q1. On a non-GAAP basis, EBITDA excluding other costs was $2 million for the first quarter of 2020. Net loss, excluding other costs was $8 million or a loss of $0.07 per diluted share. Turning to the balance sheet. Cash totaled $202 million at the end of the first quarter or the highest cash position since 2Q 2014 with approximately 35% located outside the U.S. On January 31, 2020, the company completed the sale of its previously held-for-sale business and received $25 million in cash in the period and an additional $3 million held in escrow subject to customary post-closing working capital adjustments. Accounts receivable were $366 million at the end of the first quarter, down $4 million sequentially. DSOs for 1Q 2020 were 55 days. First quarter inventory levels were $434 million resulting in inventory term rates at 4.5 times, a high watermark for our company. Accounts payable were $258 million, an amount we expect to decline quickly as we source more of our sales from stock. Days payable outstanding was 48 days. We, again, exited the quarter with no outstanding borrowings or draws against our revolving credit facility. As of March 31, 2020, our total liquidity from our credit facility availability plus cash on hand was $594 million. Net cash provided by operating activities was $6 million in the first quarter with capital expenditures of approximately $3 million, resulting in $3 million in free cash in 1Q 2020. Free cash flow plus cash received from the divestiture in 1Q totaled $28 million. Working capital, excluding cash as a percent of revenue from the first quarter of 2020, was approximately 18%, beating our historical target of 20%. With that, I'd like to emphasize the flexibility and comparative strength we enjoy in the market. Our balance sheet is solid. We increased our cash balance in the period and have no debt. We are turning working capital more than five times a year. In fact, 1Q 2020 represents the best working capital velocity in our history, a clear measure of working capital discipline. Being selective about the goods we order and in what quantities, how fast we sell our inventory and how quickly we collect account receivable provide us choices for how we deploy capital. How agile we are and how attractive we can be to our customers using the cash derived from the business, the balance sheet to invest in technology and other value-added solutions. A liquid balance sheet gives us flexibility. Moving away from the balance sheet, I will now highlight our progress and current initiatives related to our sustainable structural transformation, which we began in the second half of 2019. In the first quarter, we sold or closed 25 locations, two-thirds related to the sale of a business in January. As of this morning, we reduced headcount in the first quarter of 2020 by 700 and in addition, reduced headcount further by 550 since the end of the first quarter, resulting in headcount reductions of 1,250 since year-end 2019 or by 1,450 since June 2019 after we've completed two acquisitions in that period. Our headcount is currently at 3,150. For some color on structural transformation, we are focused on implementing two dozen cost reduction initiatives, including streamlining the cost of our customer service model and an effort to accelerate structural changes, deploy technology, and optimize processes. This includes working on every line on the financials, a focus on profitable market share gains, pushing for reduced costs for manufacturers, targeting high margin product lines and rigorously pursuing fitness at the expense line, deploying technology to augment labor content, finding the right hub and spoke balance with a bias towards the centralized structure, using internal benchmarking, for example, comparing underperforming locations with top performers and correcting the structure and delivery model to drive productivity, automating and digitizing processes and activities. Suspending all company provided retirement contributions at least to the end of 2020, recognizing the full benefit of the first quarter of 2020 investiture and reduction in cash compensation related to employee bonuses and other incentives of awards and freezing discretionary spending. Including actions underway, we expect WSA to be in the low $110 million in 2Q 2020. I'll be committed to full year WSA reductions by $40 million in 2020 compared to 2019. We are now forecasting WSA to be down $100 million in 2020 versus 2019, with more of the expense savings being realized in the second half of 2020, with expected variability due to customer bankruptcies and separation costs. Using an estimated 4Q 2020, WSA exit rate would equate to a savings of approximately $140 million as we enter 2021 compared to 2019. While we're not done, this is a major accomplishment for our company. And with that, I want to thank our executive team and our managers and employees for developing and executing on a plan for transformative change and achieving this beat in such a short timeframe. While this team has proven its ability to grow market share, improve pricing in a deflationary environment, and manage the balance sheet in a best-in-class fashion and is now delivering aggressive, sustainable efficiencies to position us well in the future. Thank you for your focus on our customers and for your care for each other and the results achieved in this unforgiving environment. With that, I'll turn the call back to Dick.

Thank you, Dave. With regard to our outlook, we're expecting spending to be down significantly on a year-over-year basis. Due to that challenging environment and OPEC visibility, any guidance we provided on the previous call is no longer in effect and we're not providing any guidance for the second quarter or for the full year. In this environment, we know what levers to pull to get through these challenging times. Cash preservation is top of mind as is defending a solid balance sheet that provides our stable foundation. I want to emphasize, we will continue to adjust where necessary, especially with regard to our structural transformation plans as the market dictates in order to protect our balance sheet and our company. We remain focused on M&A as a lever for inorganic growth, targeting accretive margin businesses that provide non-commoditized products or technology that fit within our market strategy. We have some deals working and we're still forging for opportunities. But given these unprecedented conditions, it has caused us to take a breath and it has caused sellers to take a breath. We're still looking at valuations within these companies and we're talking, but we're being patient to protect our balance sheet. And while acquisitions are still a core part of our strategy, we're being prudent stewards given uncertainties in the market. We do believe that this is the time for getting good deals at good prices, and we believe there will be opportunities out there that we don't yet know about, but we're focused on patients and prudence allowing for flexibility and agility in this market. There's no doubt this downturn will reshape our company, our industry, and the competitive landscape. Compared to the 2015/2016 downturn, DNOW is in a better inventory position, not hampered with an SAP implementation, and is more scalable and agile to respond to market volatility. We intend to take profitable market share that aligns with our strategy of better positioning DNOW in the market through diversification of customers and revenue streams and then markets. Although market conditions are tough and will cause our entire industry a lot of pain, we're absolutely going to fund our initiatives around building on our digital platform. While other companies given their debt burden or lack of cash might be reducing spending in this critical area, we're fully committed. We will continue to pursue our disruptive strategy in terms of technology and will not be reducing funding. Our strong balance sheet, zero debt, and our liquidity position and the structural transformation initiatives that are well underway enabled us to capture market share in the downturn and accelerate and thrive in the next upcycle. We're focused on being an essential partner to our customers, providing products and supply chain solutions that are critical to maintaining existing production. For our suppliers and customers, you can count on us to effectively manage through the cycle as we have done successfully for the past 158-year history of this company. Updating our CEO search, due to the restrictions on face-to-face meetings imposed by the impact of COVID-19 as well as the untimely effects of the unprecedented oil market downturn, our Board's CEO search committee temporarily slowed, not stopped the process in March. There's still a lot of work being done in the committee and its search firm continue to make progress. I believe, and on this, I'm assuming there will be no other major delays such as the ones that just cited that the Board will select a CEO before our next earnings call in August or at the latest, the end of the third quarter. Meanwhile, I've agreed to remain as Interim CEO until the process is complete and the new CEO is seated. Due to the confidential nature of this matter, we won't be commenting further. And now, it's my pleasure to recognize one of the employees whose daily hard work and dedication enable us to deliver on our company's promises. Robert Prohaska started his career with Continental Emsco in May of 1975 in Victoria, Texas. Over the next 20 years, he harnessed his sales and customer relationship skills as an outside account representative servicing the Texas oil and gas market. In 1995, Robert was promoted to the role of El Campo, Texas branch manager and he held that position until 2015. Missing the daily face-to-face interaction with customers, Robert transferred back to Victoria and returned to his role as an outside account representative and he remains there today. He's a strong family man who's willing to do whatever is asked of him. He enjoys outdoor activities including fishing, hunting, and spending time with his grandchildren. He's known for that super competitive nature, always working hard to tip the scales in the direction of DNOW as he fights on the frontlines of the oil patch, assuring that the branch he represents wins and wins big. Robert, I want to thank you for your competitive winning nature and for your 45 years of dedicated service to DNOW. On the final note, I also want to take a minute to announce that since our last earnings call, three of our long-tenured executives and icons within our company and the industry have retired, amassing a collective 120 years of service. I want to express my sincere thanks and gratitude as well as that of our Board of Directors to Craig Ballinger, Burk Ellison, and Jim Owsley for their years of stewardship, leadership, and dedicated service that DNOW has been fortunate to have you and even more so that you ensured our future by developing strong successors who now sit on our executive leadership team. Now, let me turn the call back over to Brandon to start taking your questions.

Thank you. We'll now begin the question-and-answer session. And from Cowen, we have Jon Hunter. Please go ahead.

Hey, good morning everyone.

Morning Jon. How are you?

Good. Thank you. I hope you're all doing well. First question I had is just on the outlook in the second quarter for revenues. I understand you're not giving specific guidance, but we've heard a number of completion-levered companies talk about complete shut-ins in the second quarter. And we've heard of activity declines of 75% to 85%. So, I'm wondering how DNOW's revenue, specifically U.S. upstream related may compare to those types of declines. And then on the International side, we've heard down 10% to 15% in the second quarter, so I'm wondering how you view that as well. Thank you.

I'll start with a couple of broad comments and possibly Dave will have some details to add. The second part of your question I think is fairly easy—the 10% to 15% decline in International feels right. Again, early days, a lot of unknowns with respect to impact of COVID outside of the U.S. as well as inside. But that feels fairly right. And we too have seen the estimates for second quarter overall activity declines. You can see what's happening in the rig count. And I think likely for drillers and pressure pumpers that sort of forecast makes sense. But I'm glad you asked the question the way you did in terms of how it might roll out for us. Again, we've not given guidance, but let me give you some things to think about. You heard Dave say in his prepared remarks that phrase, intentionally avoiding low margin businesses, and I want to look back first and talk about the revenue in the first quarter. And every time you've heard us talk about market share in our prepared remarks, you heard the word profitable in front of it. We don't think we have to worry or focus on driving any kind of competitive change in the marketplace. This kind of decline in activity is going to do that. There will be competitors who will not make it through this downturn, who will be weaker as they come out of the downturn. So, that's not what we're going to focus on. We're going to focus on profitable business that underpins the investment that we have in our company. And I think that you've seen a good sign of that in the first quarter with revenue coming down 5.5%, you saw that margins improved a little bit net of inventory write downs. You saw it flow through to the EBITDA line in the way that the higher projected sales would have been expected to. So, I think that's a strong sign that we are being selective. I've been pounding on the table for that and our sales and operations people have understood it and reacted really well. A couple other comments. I mean, it seems what everybody's focusing on is the decline in drilling and completions. A decline in drilling and completion work, particularly drilling side will drive revenue down for us in our lowest margin and highest cost to serve products. So, it will help sustain or, in a shortened kind of way, I guess, it helps to prop up margins, which again fits with our strategy. And then the last thing I'd add is don’t forget a lot of what we sell goes into production. You could see some OpEx improvements after the knife quits falling and people absolutely quit spending money and things turned back up after the shut-ins happened and all that. We've got an industrial component and, of course, we've got an international component. So, those are high-level thoughts about what could happen. Again, we're not giving guidance. And clearly, this is going to be the steepest decline in activity that I've ever seen in my career. But I think there are some things that underpin the way we channel into the market that will be helpful.

Thank you. I appreciate that. And then my follow-up question is just on free cash flow and working capital release for the year, if you have any broad expectations. I mean, back in 2015/2016, you released $300 million to $400 million just from working capital. So, wondering if you can help frame how much of a tailwind that might be and what free cash flow could look like for the full year.

Okay. Jon, this is Dave. Back in 2015/2016, we faced a downturn with nearly $1 billion in inventory and significant accounts receivable. Therefore, we won't see the same level of free cash flow as we did back then, and this depends on our starting balance sheet. The opportunities are still present, but we anticipate that the decline in revenue will make generating cash and managing receivables more challenging, especially as we expect more bankruptcies and struggling customers, making it tougher to liquidate receivables early in this downturn, which seems even more severe than in 2015/2016. We are concentrating on extending and managing credit tightly to maximize revenue generation. Additionally, we aim to liquidate inventory by selling above cost, minimizing replenishment, and maximizing short-term margins to generate cash from our assets. We're projecting a wide range for free cash flow, from about $75 million to $125 million, which will fluctuate based on the expected revenue decline and the liquidity of our assets. In the first quarter, our inventory turnover was the best we've seen, which is reassuring, but we anticipate inventory charges this year will be higher than what we've experienced recently. Our bad debt charges are also expected to increase in 2020. This outlines our anticipated free cash flow range and some risks associated with the rapid downturn.

Great. Thanks David and Dick, I appreciate the responses.

Thanks, Jon.

Hey, good morning guys.

Hi, Steve.

Can you provide more insights about the DigitalNOW offering in terms of its differentiation from competitors, particularly small ones? I'm trying to determine whether this initiative is intended to maintain relevance or if it has the potential to significantly increase market share.

From a high level, our organization views this as a split benefit. The first aspect, which we're progressing well on, is the internal benefit that enhances efficiencies and makes it easier for our customers once an order is placed. Our order management system provides essential feedback and analysis, which are crucial today. We're ahead of many smaller companies in this area. The second aspect, which is harder to quantify at this moment, is that we expect the greater benefit to come from the customer-facing side over time. This will allow us to offer our customers a way to interact with us that aligns with current business practices, making things easier based on their past behaviors and purchases. We aim to leverage data to assist them and build a closer relationship as a provider. Additionally, our platform should enable customers to effortlessly buy, manage, pay for, and learn from our services. While we may be slightly behind in this area, our Board has prioritized it, and you will see significant progress from us in the upcoming quarters. Dave may add more specific details, but I wanted to convey that this is a two-component effort, and I believe the most significant advantages are still ahead of us.

Yeah, I agree. I mean, I think, if you look at—we've talked about location closures and reducing our footprint in the field, that necessitates us becoming much stronger centrally and much more digital in how we engage our customers. So the project this team is working on very—projects working with customers at creating new revenue channels for the company. So they're targeted the personal. They're sticky and that customer will buy from us because we're establishing a channel just for them in some cases. So, I'm excited about the revenue opportunities from these initiatives.

Okay. And you talked about how lower drilling and completions could be positive for margin. You've obviously continued to close locations and prune headcounts. For the locations that remain, will you be removing further product lines, because just doing the same things from a product set on a smaller footprint doesn't necessarily lead to higher margins, right?

Well, we've talked for a few years now that we're really focused on high rating—really all the things we manage in our business, our locations. Each of our locations is a business. So, we grade the location on its operating profit, for example. You look at product lines and over time some product lines become more profitable because they grow or become less profitable because they become too commoditized. So, we discontinue inventory on those products and we kind of win our position with them. So that remains ongoing. So, it's a matter of high grading. We will benefit from, like Dick alluded to in some of our end markets, because it's higher cost of service and lower margins, we'll see that provide a mixed benefit in terms of gross margin. So, much of this is intentional and we've been talking about it for a few years. Some of it is unintentional, it's vagaries living in this marketplace. But that's the opportunity for us is, is finding our sweet spot locally with certain vendors or certain manufacturers and building on that in this market.

Thanks. I'll ask one more quick one. Do you know what percentage of customers are really stretched from a balance sheet perspective, and are you getting more selective about who you'll transact with based on ability to get paid?

Yeah, I wouldn't be able to get that percentage. I bet it's meaningful, I bet it's 10%. We deal with a lot of customers, a lot of big customers, small customers and we are looking at credit lines with all of our customers, and making sure that we can maximize revenues, which is really a challenged number one, and then minimize the negative exhaust that comes from giving you the wrong on extending credit to some of those customers. But priority number one is growing market share in a shrinking market and then secondarily mitigating bad debt losses, which are inevitable in this environment.

All right. Thanks for the time.

Thanks, Steve.

Thanks. Hey, good morning.

Hi, Sean.

So, with the $100 million take out of G&A, year-over-year, the bulk of that will come out for the balance three quarters. Can you talk about the cadence of the reductions and the target exit rate of WS&A as you're heading into the next year?

Yeah, we said in the second quarter that we expect WSA would land in the low 110s and then we said that for the full year we see year-over-year savings in 2020 versus 2019 of $100 million. We lose to that. And then we said our target for that fourth quarter is to exit at a WSA level that if you subtract the 4Q 2019 level, you'll realize effectively $140 million of savings as we move into 2021 compared to 2019. So that gives you kind of a feel for what land in the fourth quarter. That's kind of phase one for our efficiencies in the business. We've got those outlined, we're executing on those, but that's where we're targeting to end the year, Sean.

Got it. So it will be close to a 20% year-on-year number which looks better, with an additional basis for your top line still falling much faster. WS&A sales will increase in the near term, which is typical at this point in the cycle. However, setting aside any revenue guidance for any given quarter, what is the WS&A ratio to revenue that you are aiming for on a sustained basis?

Well, we've talked over the years that ultimately, that's going to be—it's not going to be probable in 2020, but we want to get our WSA level down to 15% or better. That's kind of a long-term goal. That's not going to happen in 2020. We're working on permanent efficiencies kind of rethinking how we deploy cash in terms of expense and where we spend our money. This is not a diet. This is a lifestyle change. So, what's really changed in here is what structural is we're going to be leaner in everything we do going forward. And that's the saleable part. In terms of WSA as a percent of revenue, that's—like I said, that's a long-term goal. That's not going to happen this year, but our mindset has changed and that will enable the kind of ratio our shareholders expect and what we committed in the past.

And so if we just take that one step further, so if your gross margin is say 19% to 20%, you back up the WS&A 15% or better, is the best of business and do you think somewhere in that 4% to 5% EBITDA range or are there other levers to drive that through a cycle basis better than what we've seen in the past?

So there are other levers. I mean, we’re in a deflationary environment we have been probably for five quarters. But our product margins are holding strong. And that—so that's hard to do it in this market. We talk about—and still a big part of our strategy is moving into less commoditized businesses with higher margins, less distribution oriented, more product oriented that will help bolster margins and evolving or really revolutionizing our cost structure to make that net margins better than the 4% to 5% you're talking about.

Got it. Okay. Thanks, Dave.

Thanks, Sean.

Yeah. Good morning, guys.

Morning.

On April trends down 33% or so. Have you seen any stabilization and the rate of change there, or has that kind of continued to decrease at an increasing rate more recently?

It's hard to say. I mean, we gave you the stats on April. We tend to—because this is how our customers tend to work, we tend to see most of our activity culminate at the end of a period. So, it's hard to read. You really need a few months to get a feel for whether the rate of change is changing. I suspect that given that in seven weeks we've lost half the U.S. rigs that rate of change is a snowball that's increased. I mean, so that's my read. Of course, May just began and you don't have a read on may yet, but given the precipitous drop in activity, I expect that rate of change to increase.

Got it. If you look at the balance sheet, you still have no debt. Is there any particular reason you would consider taking on debt? It seems like you want to pursue some M&A, but probably not in the immediate future. So, is there anything else that would lead you to think about taking on some debt, or do you plan to remain debt-free?

Sean, it’s Dick. Look, you heard us talk a little bit about our view. M&A still a core piece of our strategy. But I would tell you given what we're going through right now, this is going to cause us to protect our balance sheet even more. It's going to cause—I would say that one of the outcomes is if we're ever going to consider ever, not just as we come out of this, but if we're ever going to consider debt, the boxes across all of the components of our acquisition template—we think about acquisitions in the form of it—we have this template and we think about how well a possible acquisition fits into that in terms of tuck-ins and things. We've got all the components of it. I mean, whereas we might've had a certain threshold in the past—when you've gone through something like this, I can tell you it ramps up the thresholds. It would have to be an absolute high confidence situation and drive all of our template items. Well, we can't even think about that right now. We understand that one thing the market appreciates about us and one thing that gives us sort of life after this situation is the health of the balance sheet and liquidity that we have. We do think that in a couple of quarters there will be opportunities that we don't even know about today. And maybe some of the—some ratios would be where we'd like to see for some small tuck-ins. But I think the basic answer to your question is all this—one thing this will do, is this going to make us even more cautious. This company has done a fantastic job of using its balance sheet and paying it back. And I think what you'll see going forward after coming out of this, it’ll be just even more caution and more focus on making sure that selected opportunities kind of hit all the bills.

Got it. Sounds good. I will hop back in queue. Thanks.

Thanks, Blake.

Hey, good morning guys. How are you doing? I'm just stepping in for James who got pulled into another meeting.

Hey, good morning.

So, I've got a few questions. And I think a lot of the good ones are already asked, so my might have more a little bit of qualitative or high level. But the first thing to touch on the technology digitization angle, I think it's good that you can afford to invest there. I don't think many will be able to do so. Again, and credit to your balance sheet. But can you talk through how you're thinking about the payback periods, or the rates of return on your technology spending? And just kind of walk me through the framework for how you're evaluating that. Also any color on incremental costs, expense saves, or productivity gains from percentage base would be helpful. Where internally you plan to apply those benefits throughout the organization would also be good to learn about.

So just kind of high level on the first part, as we're putting together the plan spending schedule, we got that put together, it's being populated and adjusted every week as we continue to make progress. The paybacks, we're very conservative with what we estimate. But I would say the paybacks are fast—faster than a typical acquisition, if you will. I'm hesitant to put any ranges out there right now, but particularly when you—as Dave alluded to, when you fold in the cost savings of our bricks and mortar last mile footprint and all of the costs associated with that, and you then put in some kind of factor for sales upside or revenue upside and then all of the back office savings that go along with some of these steps. I mean, the one thing I would tell you is that payback's going to be faster than what we've seen in our typical business acquisitions. So that would be the story point. Dave, you got any—more analysis?

Well, I think, some of the work that team's doing that's kind of rolling off is internal efficiencies that enable us. So, we talked about this morning, we have 1,250 fewer employees in the business, that's very hard to do. But it's in part enabled by the investments we've made so far in streamline how we do business internally. So, that's one of the big benefits to me. And then it's the customer intimacy, where the focus will come from the initiatives the teams can be working on in the future.

Okay. Great. Thanks, guys. And then lastly if I could sneak one in. On the acquisition M&A primary, it's definitely obvious to me that you guys have gotten more constructive on that front or I would say more aggressive how you're thinking about it. But can you kind of walk us through how you see the timeframe for any kind of M&A cycle to play out? I know there's both pros and cons to doing something right now, while your competitors are in clear financial distress versus waiting it out a little bit. So, just trying to get your philosophy on when's the right time to strike?

So, let me start here. I think I'd be careful in characterizing our situation as getting more aggressive. We're getting more intense with regard to forging and watching. But we're getting more conservative with respect, as I said earlier to what we would be willing to move on, number one. And then secondly, we know there's some things out there that are coming to the table that we don't know about. And so, I think, it's—it would be better to characterize our view as patient. And therefore, that would lead me to say it's going to be a couple of quarters, I believe, minimum before we're ready to get serious. And we make sure that we've seen and be—and are able to analyze the impact of this very, very quickly falling knife on potential businesses that we feel strategically would fit in. But we know that we have to be able to value them correctly, and we've got to see where this falling knife finally lands before, I think, we can fully do that. So, I would push the message a little bit to the more conservative side. I'd say it's at least a couple of quarters and I'd say that it's going to be a—it will be harder for us to qualify an acquisition opportunity because we feel like we just got to be that much more protective of our balance sheet. No one saw this coming. Who knows what the next one will be and when, so we just going to make sure that the targets that we get seriously interested in, they're going to be very fulsomely lined up with strategy and at the right price, and they look like businesses that we can integrate very, very effectively.

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 back over to Dave Cherechinsky for our closing statements.

Okay. Well, thank you for joining us today and for your interest in NOW Inc. We look forward to you joining us in our second quarter conference call in August. Have a good day.

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