Good morning and welcome to the Third Quarter 2021 DistributionNOW Earnings Conference. My name is Brandon and I will 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 Vice President of Digital Strategy and Investor Relations, Brad Wise. You may begin, sir.

Well, good morning. Thank you, Brandon. And welcome to NOW Inc.’s third quarter 2021 earnings conference call. We appreciate you joining us and thank you for your interest in NOW Inc. With me today is David Cherechinsky, President and Chief Executive Officer and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the DistributionNOW and DNOW brands and you will hear us refer to DistributionNOW and DNOW, which is our New York Stock Exchange ticker symbol, during our conversation this morning. Please note that some of the statements we make during the call, including the responses to your questions, may contain forecasts, projections and estimates, including, but not limited to, comments about our outlook for the company’s business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume 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 or our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP, you will note that we also disclosed various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA, net income, excluding other costs and diluted earnings per share, excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. A reconciliation of 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 a 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 third quarter 2021 Form 10-Q 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. I’d like to begin this call with a big thank you to the thousands of DNOW women and men around the world who successfully connect the manufacturers we support to the customers who rely on us to power the world for a sustainable future. Things are challenging on many fronts, the COVID surge, labor and material shortages, elevated transportation costs, and changing political winds among other things. Despite these factors, we performed very well. We have seen strong demand this quarter, especially in North America. Our service to customers has been exceptional. We are leveraging our scale, modernizing our geographic footprint, and demonstrating agility as we keep the customer at the center of every dollar we invest. Our goal is to always be in an advantageous position to help our customers achieve their goals and solve their problems. While the supply chain environment is stressed, we are confident in our skills to respond to the evolving dynamics. In the face of labor and material shortages, we are providing superior service and helping our customers minimize disruptions. We are investing in inventory to seize growth as the market expands further. While we navigate tight supply chains and labor shortages quite well, these disruptions impacted revenues a bit more in the third quarter of 2021 than in the previous quarter, especially in the area of steel pipe and for products in U.S. process solutions. These trends seem likely to endure in the short term. To address these we are leaning on technology, alternative supply sources, and branch initiatives to improve productivity in order fulfillment. The degree and pace of recovery is contingent upon COVID impacts, customer budget discipline, ESG initiatives and availability of capital, labor, and products amid the lingering supply chain bottlenecks. We have taken action in a transforming market, one where we see a bright future for DNOW and our customers. Domestically, the public E&P spending abstinence has emboldened private E&Ps to spur operations, driving nearly 80% of the U.S. rig count growth in 2021. 3Q '21 was a really good quarter, where we achieved 10% sequential revenue growth, beating our mid single-digit revenue guide. We achieved a record quarterly gross margin percent that drove greater than forecasted flow-throughs on relatively flat warehousing, selling and administrative expenses. Later, I will close with how pricing and gross margins are driving our strategy. We delivered $15 million in EBITDA or 3.4% on $439 million in revenue. For context, looking back at another recovery year, for the full year 2017, DNOW generated more than $2.6 billion in revenues, but just $7 million in EBITDA during that full year. As a point of comparison, we generated $439 million in revenues in 3Q '21 and more than twice the EBITDA dollars on one-sixth of revenues when compared to the full year of 2017. This is a significant achievement and a major pivot allowing for greater incrementals, a leaner supply chain and reduced inventory risk as a byproduct of our fulfillment model modernization. In the worst downturn in history, we acted quickly and adroitly. These achievements are a testament to our employees’ hard work and our management team’s focus and determination in strategic execution by resizing DNOW and reshaping our strategies for current and future markets. We achieved these results despite some of our revenue engines not firing on all cylinders. For example, projects in the U.S. midstream market have remained relatively muted. International growth continues at a slow pace, as the pandemic impacts the demand for oil and gas, thus keeping some OPEC plus supply off the market. And a number of carbon management energy transition projects are just in the early planning stages, where DNOW possesses a number of PBF and engineered solutions, which offer future revenue opportunities. As one or more of these cylinders begin to fire and activity materializes, which I am confident they will, this will be an accretive tailwind to DNOW’s revenues and bottom line results. We believe this sets us up nicely for what we expect to be a much stronger 2022. Now, some comments on a regional basis. In the U.S., revenue was up $16 million sequentially. U.S. energy revenue increased sequentially due to drilling and completion activity and favorable margin contributions, primarily from steel pipe inflation. The recent increase in land contracts to drilling rigs was dominated by private oil and gas producers during the quarter, where DNOW is actively targeting customers and making positive inroads. We experienced broad product line sales growth across the U.S. as drilling completions, gathering lines, and tie-ins were sold into the oil and gas producing regions. A notable portion of joint programs is targeting well locations in proximity to facilities that have additional processing capacity, meaning a portion of our producer customers are spending lower CapEx per well site than they had historically at least for now. Market share gains in the quarter, including a major operator in the Permian, whose rigs remained flat sequentially, but revenue increased substantially from central tank battery builds. We expanded PBF sales through several EPCs for tank battery builds in the New Mexico, Delaware play. Also during the quarter with a focus on private operators, we executed several MSAs, which will open future growth opportunities for their Permian assets. We increased market share with PBF for facility builds for a private producer and several line pipe sales with the gas utility company. In the downstream sector, we provided the PBF to several chemical processing companies for plant turnarounds in a major valve upgrade project at an inland refinery. Highlighting how customers are using our mobility-based technology solutions to drive point of sales efficiencies, we implemented a customer onsite inventory solution, where customers access our DNOW app from their mobile phones to procure material. Customers can also connect with our local branch on the mobile app to place orders for pickup or delivery. Shifting to U.S. process solutions, revenue expanded sequentially from increased completions activity, with drilling operations and DUC draw-downs yielding higher demand for our fabricated engineered equipment packages. In addition to pump packages for fluid handling, engineered packaged units were delivered to the Permian, Eagle Ford, Rockies, Powder River, and Bakken plays. Products include a variety of ASME pressurized vessels, including heater treaters and separators and oil transfer skids. Activity in the midstream and water management markets is increasing as demand for tank units, pipeline blending skids, and water transfer units increased during the quarter. In the downstream sector, we provided a number of pump packages in refinery applications located in the Northern Rockies and delivered a large order of valves tied to a soda ash mine project in Wyoming. On the municipal waterfront, we are seeing increased levels of quote activity for pump packages as projects in this end market begin to gain traction. On the aftermarket side, we are seeing demand pickup for our field service offerings on pumps and air compressors. Our field service work drives parts and labor sales, which deliver strong margins to our base distribution business. In Canada, third quarter revenue was $68 million, a sequential increase of $17 million or 33% amid continued share gains in the market emerging from the seasonal breakup. Western Canadian select heavy blend averaged $57 a barrel for the quarter and is fostering bullish sentiment for increased CapEx budgets and project activity for key oil sands producers. In addition, with improved natural gas prices, the macro sets up well for more projects to drive conventional and midstream growth. Our preassembled kit packages for wellhead hookups and tie-ins led to notable gains in the quarter with many of our customers. Finally, we continue to see success with our valve and actuation product line winning business with multiple EPCs we have targeted with a number of major E&P and midstream operators. For international, in the third quarter, revenue was up $6 million sequentially or 11% to $59 million. International drilling activity is beginning to pick up as OPEC plus spare capacity begins to narrow as demand for energy increases. DNOW is positioned well in key areas to take advantage of increased drilling activity with a number of our drilling contractor frame agreements. Some notable international wins include delivering electrical PPE and MRO products on various project orders to a major oil and gas upstream operator in Iraq. In the CIS region, we were successful in receiving project orders for PPE in Kazakhstan, while obtaining notable wins for PFF with an EPC in Russia. In Indonesia, we provide a balance to an EPC for a project at a downstream petrochemical facility. In Australia, wins include shutdown valves and spares for a major international oil and gas company, in addition to project awards for control valves for a major international gas producer. MacLean International delivered electrical cable for an onshore gas expansion project for an Australian-based engineering and construction firm and an electrical cable order for solar panels to a customer in Australia. We have been busy securing future business by executing in a number of key frame agreements for our electric business that includes a 3-year agreement for a major oil and gas producer operating in West Africa and a 5-year agreement with a global EPC. These agreements provide future opportunities to secure meaningful electrical products revenue as projects and MRO business accelerates. In Brazil, we delivered a large valve order from an EPC on an FPSO project producing for a major national oil company. We also leveraged our total valve solutions offering, including our digital valve asset management solution, with an offshore Brazilian producer capturing valve orders in addition to notable wins from several offshore drilling contractors. Now, I would like to address the impact that global supply chain delays and inflation are having on our business. With our PBF product lines, we maintain a global sourcing strategy, where we source from several preferred domestic and import manufacturers, which allows us the option to proactively manage our inventory availability to meet customer demand in times of supply chain disruptions. Our procurement and sourcing teams have done an excellent job ensuring high product availability during these logistical challenges. For steel pipe and some components that are assembled as part of our engineered process, production, and pump packages, we are experiencing product delays in some of our packaged offerings, pushing approximately $5 million to $10 million in 4Q '21 orders into the new year. Moving to our DigitalNow initiatives, in terms of our digital commerce channels, we continued to increase customer adoption, now eclipsing 44% of SAP revenue connected to our digital channels during the third quarter. We onboarded numerous B2B e-commerce customers across midstream industrial and service companies this quarter. We continue to work with our digitally integrated customers to further enhance their e-commerce experience via optimizing their product catalogs and developing customized workflow solutions through our shop.dnow.com platform. Our technical sales team on our U.S. process solutions business is leveraging our eSpec product configurator tool to capture revenue. During the quarter, we saw an increase of active users by 48%. And recently, we enhanced the user experience by incorporating three-dimensional imaging and the ability to view our packaged units in an augmented reality environment. This allows our customers to better visualize what the completed package would look like from a 360-degree vantage point. We are using eTrack, our asset management lifecycle tool, to improve the accuracy of customer-owned equipment counts, to enhance traceability, and reduced labor costs associated with required monthly yard reconciliations. We are using eTrack within our materials management customer engagements, enabling higher productivity and driving more value for both parties. Now, I’d like to touch on a few comments related to energy transition. As we have seen during the third quarter, the elevated price of oil and gas is a result of increasing demand for energy on supply that requires continued investment to expand. For DNOW, we are a critical part of enabling our customers’ ability to safely and efficiently produce and transport energy to market. The products we distribute combined with our highly efficient supply chain services solutions, help our customers achieve lower cost production when producing and transporting oil and gas. We are investing in expanding our solutions to help our customers reduce greenhouse gas emissions as well as solutions around carbon capture, storage, transmission and management. In the third quarter, we used our eSpec software to drive more meaningful conversations with customers to reduce greenhouse gas emissions, noting specific value tied to compressed air system solutions, which offer direct replacement of methane gas venting systems. In one example, we provided air compressors and drying equipment packages to producers who are committed to reducing greenhouse gas emissions from gas pneumatic devices replacing them with compressed air systems. This is a great example of how DNOW is able to improve our customers’ ESG profile by helping them meet their emission reduction targets. Additional emission reduction solutions we offer our customers focused on upgrading pumps and pump seals to minimize leaks and greenhouse gas emissions and tank battery designs. We are collaborating with producers on carbon-dioxide, direct air capture projects as well as dedicated CO2 capture and transmission projects. So, we are excited about our core markets and equally excited about the emergence of new end markets, which enabled DNOW to expand our top line into the future. With that, let me hand it over to Mark.

Thank you, Dave and good morning everyone. Total third quarter 2021 revenue was $439 million, a 10% increase over the second quarter of 2021 outperforming our guided mid single-digit percentage growth. The U.S. revenue for the third quarter 2021 was $312 million, up $16 million from the second quarter and our highest level since before the pandemic on increased customer activity and significantly improved product margin contribution. Our U.S. energy centers and process solutions revenue channels were up 5% and 7% respectively, with U.S. energy centers contributing approximately 80% of total U.S. revenues in the third quarter. Moving to the Canadian segment, Canada revenue for the third quarter of 2021 was $68 million, up $17 million or 33% from the second quarter as we successfully expanded our revenue in both the upstream and midstream space. Year-over-year, revenue was up $26 million or 62% from the third quarter of 2020. International revenue was $59 million, an increase of $6 million or 11% from the second quarter, primarily from increased project activity. Gross margins improved sequentially 60 basis points to 21.9%. This increase was primarily from higher product margins as inventory charges remained relatively modest at $2 million in the quarter. Gross margin gains were fueled by the inflationary currents in the steel market, impacting line pipe and high steel content fittings and flanges, but we also captured margin growth, albeit to a lesser extent across our other product lines as we selectively migrate towards those products and solutions that provide the greatest value to DNOW. Inventory charges vary depending on the actions taken to adjust our business model to support current and future activity, including customer demand changes both in volume and preference, the incline or decline in the market and specification changes on available products. We continue to evaluate our products and locations to align to the changing market conditions, customer preferences and our strategy, which could impact the level of charges going forward. In the third quarter of 2021, warehousing, selling and administrative expenses, or WSA, was relatively flat, up $1 million sequentially, with cost reduction initiatives not fully offsetting the waning government subsidies in the period. Third quarter government subsidies which totaled less than $1 million were down from almost $2 million in the second quarter and we expect these benefits to continue to phase out through the fourth quarter. Considering this and other actions underway, we do expect WSA to remain relatively flat into the fourth quarter and we are expecting modest decreases in WSA in the first quarter of 2022 as we see additional traction from our longer-duration initiatives begin to bear fruit. Operating profit for the third quarter was $10 million and we delivered favorable year-over-year operating margin flow-throughs across all three segments driven by improved gross margins on a reduced WSA. In the third quarter, we generated operating profit in all three segments last achieved 2 years ago when our revenue was 70% higher, a strong indicator reflecting how well we are leveraging our lower cost base. Sequentially, the U.S. delivered 44% incremental flow-throughs to operating margins and a $4 million operating profit in the third quarter. This is a notable improvement for the U.S. segment as we continue to deliver more revenue across our cost base. In the third quarter of 2021, the international segment reported $1 million in operating profit or approximately 2% of revenue and Canada delivered $5 million in operating profit, 7% of revenue, with 18% incremental flow-throughs in Canada to operating margins as it emerged from seasonal breakup. GAAP net income for the third quarter was $5 million or $0.05 per share. And on a non-GAAP basis, net income excluding other costs was $6 million or $0.05 per share. Non-GAAP EBITDA, excluding other costs, was $15 million or 3.4% for the third quarter of 2021. As noted in our improving results, we have been focused on continuously identifying and implementing initiatives to transform our operating model, increasing our value to customers and maximizing our customer service. The hard work and commitment from our employees can be seen today in our financial performance as year-over-year revenue expanded 35% on a significantly improved cost basis. We delivered 3Q EBITDA flow-through sequentially of 23% and 27% year-over-year. The high flow-throughs are a combination of higher product margins, paired with our team continuing to create business efficiencies that enable greater revenue across our network. I will also point out a low operating profit and other expense for the quarter, included approximately $1 million in expense related to the increase in the fair value of the estimated contingent consideration liability. As of the end of the third quarter, we have a net cash position of $312 million, up $19 million from the end of June. Total debt remained at zero and included zero draws in the quarter, with total liquidity, which is calculated as total availability from our undrawn credit facility of $248 million, plus cash on hand equaled $560 million as of September 30, 2021. Accounts receivable were $299 million, an increase of 10% from the second quarter, and inventory was $244 million, down $6 million from the second quarter, with inventory returns now reaching 5.6 times, a quarterly best. Accounts payable were $243 million, an increase of 12% from the second quarter. And as of September 30, 2021, working capital, excluding cash as a percentage of our third quarter annualized revenue, was 10.6%. With some of the working capital reduction this year attributable to the $19 million in estimated fair value of contingent consideration, which is subject to change and we do expect this working capital ratio to increase some as we intentionally fuel growth by adding working capital to grow the business. Our commitment to working capital efficiency is reflected in a new quarterly best cash conversion cycle of 62 days, marking five consecutive quarters of improvement. A primary driver for these working capital efficiency gains has been increased inventory turns, which helped to minimize the cash needed to fund our sequential revenue growth. Free cash flow in the quarter was $22 million. And when looking back 3 years, we have generated approximately $0.5 billion or more precisely $486 million in free cash flow. We are committed to balance sheet management, making investments in good inventory, pursuing strategic acquisitions, and maximizing asset health to fuel the future. We celebrate the successful quarter with optimism for the future and we possess the talent, resources, and fortitude to grow our bottom line, develop a more agile business, and create sustained value for our customers and shareholders. With that, I will turn the call back to Dave.

Thank you, Mark. And now a view on M&A in the fourth quarter, we remain focused on deploying capital to capture organic and inorganic opportunities for DNOW. Through M&A, we are targeting accretive margin businesses that provide non-commoditized solutions that fit within our strategy. We continue our active engagement with potential targets as we evaluate opportunities in our strategic areas of focus. One area of focus is on strengthening our process solutions product lines, by adding companies which create competitive advantage, differentiation, and build barriers to entry for DNOW. Another area of focus is on businesses that help diversify our end markets to provide greater market differentiation. As you can tell, I am excited that the company once again achieved solid results, with better than expected sequential revenue growth of 10%, a third consecutive quarter of record-breaking gross margins, and EBITDA excluding other costs of $15 million, well above expectations. Our strategic execution accelerated these results and generated $22 million in free cash flow in a period, where we would have historically consumed cash. Looking near-term at the fourth quarter, we typically see customer expenditures slowed down due to a combination of budget exhaustion and reduced customer activity due to the holidays in November and December. This typically creates seasonal headwinds to sequential top-line growth. Furthermore, shipping delays on imported products and the lack of product availability has the potential to delay revenues. Taking this into account, our view is that the revenue in the fourth quarter will be flat to down mid single-digits sequentially as we experienced seasonal headwinds that we don’t expect to repeat into 1Q '22. We anticipate full year 2021 EBITDA improvement over full year 2020 to be nearly $90 million, representing a fundamental shift in the capabilities of the company and its earnings potential, again laying the groundwork for a strong 2022. Looking ahead, we expect fundamentals in our business to continue to improve with global demand for energy improving and the supply of energy from oil and gas poised for growth after years among your investment. We are excited about 2022, especially as a number of industry analysts are forecasting double-digit growth in 2022 to what some have termed the beginning of a multiyear energy supercycle leading to sustained growth. Finally, I want to close on gross margins and pricing and really hit this point hard. We are very deliberate about high-grading our business. And by that I mean focusing on higher margin manufacturers, businesses, product lines, locations, activities, end markets and customers for a perpetual track to improving product margins. Like every organization, we too have limited resources. So, we must choose where we allocate our time and talent and treasures. We are picking suppliers, expecting partnership reciprocity, committing to spend with them, honoring our commitments, promoting their brands and deliberately promoting value, focusing our inventory investment, and focusing our precious human capital on higher margin opportunities, focusing our talent where the customer sees value, where the customer is willing to pay for the value we provide. Conversely, we are un-focusing and disfavoring lower margin opportunities. There is no nexus in allocating precious resources, inventory and human capital, where the customer does not see value. I want to highlight what this focus means to earnings. Product margins over the last six years on a per year basis were from 2016 forward 18%, 19%, 20%, two years in a row as 2019 market activity declined below 2018 levels, 21% in 2020, and now 22% on a year-to-date 2021 basis. This is not accidental. This is not market derived. In fact, many of these product margins gains were achieved in a period of deflation. This was intentional, an outcome wholly created by the women and men of DNOW, where our organization finds its place in the heart of customers where they see value, focusing our valuable resources on the right opportunities. Now, couple that strategy on top of a much leaner, more streamlined business, and the result is durable earnings power greater than what we have been able to achieve in the past. With that, let’s open the call for questions.

Thank you. We will now begin the question-and-answer session. From Benchmark Research, we have Doug Becker. Please go ahead.

Thanks. Dave, I would like to continue on the margin commentary, just maybe a little more insight into what you see for the fourth quarter given the multiple moving parts. But then even longer term, last quarter, you were still talking about 22% being a target. Given this quarter’s results, it certainly looks like a readily achievable target and just maybe your latest thoughts on that and margins longer term?

Yes. Good morning, Doug. Thanks for the question. Yes, I did say 2022 – 22% as a target, I didn’t expect to see margin appreciations like we did in the third quarter. In fact, we guided to some compression. We have our management team – I tried to make the point towards the end of my opening comments, like any family, any business, any organization, we all have limited resources, we have to make choices. As we migrate, how we fulfill customer requirements, we tasks our – task, our resources pointed at them, the higher margin activity in everything we do. We are negotiating new deals with long-term customers, suppliers, long-term manufacturers, we are trying to get the best possible price. We are trying to give them all of our business, so they understand reciprocation. And then we are changing how we price things. In the past, a lot of people in our company had pricing authority, we are changing that, so that we can maximize the delivery of the right products to our customers at a good margin. That’s, we are doing that across the board. We are buying companies with – the companies we bought this year anyway, with better gross margins, better expense as it relates to revenue. And we are, like I have said, disfavoring those at the other end of the spectrum. So, while 22% is a record for us, I don’t see this as a floor yet, because we did enjoy the benefits of pipe pricing. In a period like this, where product availability is scarce, it comes down to allocating products to customers. And if we can acquire it, and as a large oil and gas distributor, we have – and we have a better position in terms of product acquisition, we command the higher price for having the products in the first place. So, 22% remains our target, can we build on that, I believe we can. It is an organizational effort that we pursue the value for our customers. We meet them where they see the value in DNOW. We have to allocate our resources to those efforts and then not to those where they don’t see the value. So, I think the opportunity is for greater margins in the future. In the third quarter however, we did see a benefit from pipe and we could talk a little bit about – more about that as well.

Well, lots of things that are certainly showing up in the numbers. Maybe just talking a little bit more about piping as it relates to just the fourth quarter. Would you expect a little gross margin compression in the fourth quarter, just given revenues that might be flat to slightly down?

Yes. I think that’s implicit in our guide, because – so, while we have been very good at fulfilling customer requirements, we are – things are slipping a little bit in a few key areas. Again, we are working to fill those gaps to make sure we can maximize customer service and product availability. But in the areas of steel pipe, we are tapping all of our resources around the world, important domestic pipe sources to acquire pipe. And we are seeing some slippage in terms of product availability. So, that could mean better margins but lower revenues. So, the mix, we would see a mix issue there where our pipe sales could go down in terms of total sales, which would have a negative impact on margins. So, that’s one reason why we might see some gross margin compression in the fourth quarter. Secondarily, we do – we are seeking alternate sources. And for fungible goods, where alternatives are available, we might seek a sourcing strategy where we buy from competitors or master distributors, and we pay a little bit more for the product. We get the revenue, but we see a little bit less in terms of gross margins. So, to answer your question, yes, we expect a little bit of compression. I have said that for a few quarters, I have been pleasantly surprised. But I gave a little color on my opening comments about how we are seeing $5 million to $10 million in projects, or orders that are slipping into the New Year, basically due to waiting on products to arrive. And those tend to be our higher margin product lines. So, I guess the answer is yes, we will see some compression and likely due to those reasons. I feel as a short-term margin compression and to your original question, I think we can get back into that 22% range into the New Year.

Final one just can’t help in notice the traction you are getting within valves globally, it’s an area where you are targeting some acquisitions, just any context about the current size and how big that business might be – might ultimately become?

Well, I think in terms of our total sales today, valves discreetly represent about 20% of our business. Now, that there is also where we do kitting, and they are part of a project and those values may not be considered there. But to me, it’s a matter of the right kind of valves and the right kind of profitability for the lines we carry. But we see that as one of the more – it’s one of the few products we carry that where there is a high brand preference for. We have very little brand preference for pipe and fittings and flanges. But for valves, there is a brand preference there. So, we get the right agreements with our suppliers. And as we grow our actuation service business, we can see that continue to grow. We haven’t set a size for that part of the business. But we see it as a big opportunity for us to manage a fleet of various competing valves out there to do valve and actuation services and to become more and more important to our customers in that process.

Got it. Thank you.

Thank you, Doug.

Good morning. Thank you.

Good morning.

So, I guess to round out the discussion on 2022. I mean, it seems like you will start the year at the 22% type gross margins. You alluded earlier in the commentary for double-digit type increases, in the top line, I believe. Some of the larger OFS companies are talking about 20% increase in E&P spending next year in North America. I am curious if DNOW agrees with that outlook, or is there a potential upside to that if you see market share opportunities? I know you are kind of actively targeting the private, so that could be an area of opportunity. So yes, if you could just speak to that that would be helpful.

Yes. I think what we were saying in terms of 2022, of course, we are not prepared to give guidance on 2022. But there is a lot of optimism. And most people are talking about 10% growth or greater, some of the numbers get into – well into the teens. We are not there yet. But so there is two things there. We are – I was pretty outspoken on the opening comments about this notion of limited resources and a focus on really cherry picking the highest margin, highest EBITDA margin opportunities in terms of product line focus. That could mean, we move away some product lines. And that could be a headwind to revenues in the New Year, but a boom to earnings at the bottom line. So, while I believe again, we haven’t fashioned a budget, that 10% is probably a good starting point for the New Year. And it could be materially stronger than that. And there are many things impacting that, of course. But we are bullish on 2022. And I think we should see growth in that range for sure.

Thanks. Thanks, Dave. That’s helpful. And following up on that, the WSA is kind of flat in the fourth quarter, and then there are some opportunities to reduce that in the first quarter of 2022. Is – do you think you can whittle that down to kind of an $80 million type run rate on WSA by the end of the year, or what kind of context should we be thinking about for your target on the WSA line in 2022?

Well, let me answer the question this way, because growth will impact how much where that WSA line goes. if we are able to land some of the acquisitions we have on the table right now. Of course, all of that’s going to impact that. But we have plans in place to, as we standup our super centers in Casper, Wyoming, and Odessa, Texas, in Williston, North Dakota. Three major investments across the spine of the U.S. oilfield, we should continue to see improvements in our cost structure. As it stands right now, we expect to pull $12 million of expense out of the business at a flat level of revenues. So that can – that would potentially being WSA down by $3 million a quarter. Now, if our growth is much higher than 7% to 10% and that will change that WSA number. So, the greater the growth, you or we might project will impact that WSA number unfavorably, right. That WSA number will be a little higher if the growth was stronger than we forecast. But we do have efficiency measures that we will achieve in 2022. And they are in the $12 million to $15 million range right now.

Great. Thank you for that. And then last one for me is the free cash flow in the quarter was impressive. I was expecting a little bit of a working capital build, you actually released a little bit. So curious, as you think about 2022 and your inventory needs, how should we be thinking about working capital consumption in the fourth quarter, or perhaps early in 2022?

Well, so the biggest thing impacting whether we produce or consume free cash flow in the fourth quarter is the timing of receipt of goods. So, we have tens of millions of dollars of inventory on order, as we often do, but we are like I have said, we were clamoring to get some of this product lines in here faster. Those would be offsets to free cash flow in the fourth quarter. But our current modeling shows that we will generate cash in the fourth quarter. It will be zero to a few million dollars, probably. Now, last quarter, I think we said we would consume up to $30 million to $40 million in the second half of the year. It could be that we produce $30 million in the second half of the year, as it turns out. So, in the third quarter, we turned our working capital 9 times on an annualized basis, which is unheard of for an inventory-intensive accounts receivable intensive company. We sell goods to our customers on terms and we have to invest a lot of inventory to generate the kind of sales we generate. We turned our working capital 9 times. So, that’s something that’s going to be hard to maintain, likely we won’t maintain it. But so that our working capital turns will get a little less great. But it’s possible, and it’s probably a good bet. We will be generating cash to some level in the fourth quarter. It could be could be zero, but could be a little bit more than instead of consuming cash like we had expected earlier on.

Great. Thank you. I will turn it back.

Thanks, Jon.

Good morning, everyone.

Good morning, Nathan.

Following up a little bit on the WSA commentary, that you obviously, you said obviously that WSA number is going to depend on what growth is, maybe you could give us a little bit more color on what kind of WSA you would be looking to add back per dollar of revenue increase. So, if you increase revenue by $1, do you need to add $0.10 of WSA, $0.05 of WSA, any kind of color you can give us on that?

Okay. I will make a stab there. To me, every dollar of revenue should include no more than $0.05 in WSA. And again, I have said for many quarters, that our expense or WSA as a percent of revenue remains too high. I have also said that once we bought – once the market bottomed, that we were primarily focused on growing the business, on taking market share, on growing gross margins in a highly – hotly contested competitive environment. And we are doing those things. So, I am most urgently concerned about our position in the market and growing the business. And that could entail some additional expense. Expense as a percent of revenue in 2020 won’t go down. We are going to be careful about not adding expenses. I have talked a moment ago about I plan to pull $12 million to $15 million of expense out of the business at current revenue levels. But to answer your question, discreetly, $0.03 to $0.05 per each dollar would probably be acceptable. But we also need to get our expense more in line with our targets long-term.

Okay. So, we take the $12 million to $15 million out on the – once the super centers are stood up. And then from there, each dollar should add $0.03 to $0.05 of WSA. If you are doing gross margins of, let’s say 21%, and you are adding $0.03 to $0.05 back of WSA per dollar of revenue, does that maybe we should be looking at kind of an upper-teens incremental EBITDA margin as volume grows, adjusted for the initial $12 million to $15 million of super center settings?

Yes. So historically, and we have generated 10% to 15% incremental when we grow. But to answer your question, those incrementals should be in the 15% plus range. They should be closer to the high-teens, especially in a period where we have product scarcity, which is a real boost to gross margins in the short-term. But those incrementals should be in the teens and potentially in the high-teens.

Great, that’s very helpful. One more, you talked about the private guys really being the driving force behind the increase in drilling at the moment, what’s your expectation around the public guys? I mean, I think historically, private guys getting first followed by the public guys, but the public guys have had religion forced upon them by investors, when it comes to spending a lot of capital relative to previous cycles. So, maybe you could comment on your expectations there as we go forward?

Okay. Well, like we have seen for the last few quarters, I do think the privates will be first in and do more of the drilling. We would like to see that change a little bit in 2022. I don’t know that it will, it probably won’t, we will still see the privates driving the joint investments anyway. We like the bigger guys, because the risk profile is different. We have historically focused on the Shells and the Chevrons and the Oxy’s and the big companies, because our risk level is different. On the smaller private companies, we have to be very careful there. And we are making nice inroads there, but the risk profile is different. I think everyone is going to spend more money next year. It’s hard to gauge though, because especially the public companies are very disciplined to a degree we have never seen before. And that all – that hurts us in the short-term, because as oil prices are in the $80 range, we think our customers would normally spend more at this time in the cycle, but it will help us a lot in the long-term as we won’t see the kind of volatility due to the sloppiness we have seen in the past. So, I think it will be more private. But we are waiting to see what our customers are going to put in their budgets and we will shape our focus accordingly.

Great. Thanks for taking my questions.

Thanks, Nathan.

Thank you. And ladies and gentlemen, we reached the end of our time for the question-and-answer session. I will now turn the call over to David Cherechinsky, CEO and President for a closing statement.

Well, I would like to thank everyone for calling in today. Thanks for taking the time. Thanks for your interest in DNOW. And I look forward to talking to everyone in early 2022. Have a good day.

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