Hello, and welcome to the NOW Inc. Second Quarter 2022 Earnings Conference Call. My name is Nadia, and I'll be your operator for today's call. I will now turn the call over to Vice President of Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Thank you, Nadia, and good morning, and welcome to NOW Inc.'s second quarter 2022 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'll 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 this 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 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 for 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 their 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'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 earnings per share excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. Please refer to the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of our earnings release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the second quarter. A replay of today's call will be available on the site for the next 30 days. We plan to file our second quarter 2022 Form 10-Q today and will also be available on our website. Now, let me turn the call over to Dave.

Thanks, Brad, and good morning, everyone. I'm thrilled to be here today celebrating a record-breaking quarter, the 6th consecutive quarter of significantly improved financial performance and prospects for the company. What an exciting time it is for DistributionNOW. Revenues in 2Q '22 were 14% stronger than the first quarter, well above what we guided, and 35% higher when compared to the same quarter in the prior year. Our gross margins climbed to a high watermark of 23.7%, aided by healthy project product margins, resulting from inflationary headwinds, lower inventory costs and pricing benefits, which outpaced our previous full year margin guidance in the 22% to 22.5% range. Warehousing, selling and administrative expense or WSA was driven down to its lowest level as a percent of revenues since the third quarter of 2014, a time in another era when there were 1,900 U.S. rigs, more than 2.5x the 2Q '22 level. EBITDA in the second quarter was $47 million, with 2Q '22 EBITDA alone exceeding the results produced in all of 2021, representing again the highest levels of EBITDA since 3Q '14, a bygone era, given today's significantly improved rig efficiencies and capital discipline by our customers. EBITDA in terms of percentage of revenues was 8.7%, an all-time record achievement. Working capital excluding cash remained strong, turning more than 6.5x annually enabled by continued healthy inventory turns, despite planned inventory growth, which was pre-positioning to ensure that products are available for our customers and to strengthen our indefatigable push to maximize gross margins. And late in the second quarter, we closed on a small but potent U.S. process solutions acquisition and expansion on our 2021 Flex Flow purchase, fortifying our leading position in horizontal trailer mounted rental pumps. These results are without a doubt, a result of the loyal and talented 2,300 members of the DNOW family who have transformed this company by focusing on what matters most to our customers. We continue to refine our model to drive efficiencies to regionalize fulfillment while maintaining proximity to our customers, like no one else in our space. Our drive is to make this incredible turnaround indelible, which is the main objective for this team right now. This is a testament to our unrelenting mindset focused on understanding our value in the market, evolving our product and service mix to be selective about the business we target and the activities we sidestep. While we celebrate our results, we acknowledge that we can still enhance our model by capturing additional efficiencies and investing in our people and technology in the coming quarters to continue this transformation. Today, our customers understand the value we offer in terms of having access to top-tier quality products, technical sales expertise, critical product availability, and a customer service model geared to align around a common goal. Our team outperformed, revenues came in better than we guided to in the first half of the year and are expected to be even better for the full year. In the second quarter, revenues were stronger as we saw customers pull in and accept delivery for future needs early due to worries about supply chain issues. Our revenues benefited from that in 2Q. Two large projects in process solutions, including one for $9 million, delivered earlier than expected. And the expected 2Q seasonal revenue breakup in Canada was the narrowest decline we experienced in the last nine years. This 2Q revenue overperformance means a lighter sequential revenue bridge going into the third quarter, yet we still expect a better than average 2Q to 3Q build compared to prior years and a much stronger 3Q than our guidance implied last quarter. And now some color on our segments. In the U.S., revenue was $408 million, up 22% sequentially on 13% U.S. rig count growth. U.S. growth was bolstered by expanding E&P customer activity. We are capturing the rewards of the efficiencies that we've talked about over the last couple of years and have selectively targeted the opportunities with customers to execute orders and projects from our new regionalized fulfillment model and centralized project execution teams. Forward positioning our inventory to our new PVF+ supercenters has enabled DNOW to become the preferred choice in product availability in a hyper-competitive market. Combined with our innovative solutions-oriented employees with a customer-first mindset, it affords DNOW the opportunity to capture margin accretive share. We continue to supply packaged units and MRO products to help reduce our customers' Scope 1 emissions working with our dedicated emissions reduction teams. We are seeing increased activity and demand for our fiberglass solutions as customers recognize the value of our turnkey solutions and expertise. We experienced growth as we supply PVF and safety services for several operators during an extended turnaround season. In the biofuels area, we provided PVF to refineries to support their renewable diesel expansions and turnaround projects. During the last three to four calls, we've talked about positioning and investing in growth. In addition to the investments in inventory, we just completed a full quarter of business for a new express location in the Permian, where we have made excellent progress in terms of servicing existing new customers while maintaining customer proximity and delivering value to the last mile. Most day-to-day activity there is managed locally, while project and large unplanned orders are being fulfilled from the nearby supercenter. For U.S. process solutions where customers previously carried excess inventory, customers were ordering equipment in advance, taking into account a shortness of inventory and long lead times. We benefited from our unusually high pre-planning and buying activity in the second quarter. Furthermore, some customers are dealing with a lack of workforce availability and field experience for installations, and that difficulty benefited our turnkey and engineering solutions. We are pleased to see how we're now recovering the saltwater disposal market, where we shipped SWD units for operators to dispose of produced water from drilling activity. We continue to seek ways to reduce our customers' Scope 1 emissions. Our customers are replacing gas pneumatic systems with compressed air systems, which has led to high demand for our instrument air packages, and those orders are continuing. We continue to collaborate with customers to leverage additional ESG benefits. We recently developed and shipped a number of solar and battery-powered chemical glycol units, which prevent ice formations at the wellhead during freezing temperatures. These units would have historically been gas-powered and emit greenhouse gases to the atmosphere. This is now one of the ways the industry is seeking to improve and lower greenhouse gas emissions. On the fluid handling and pump packaging side, we are seeing demand improve for our crude oil pipeline packages as oil production grows, and midstream customers are looking to debottleneck existing oil pipelines. In Canada, our team continues to exceed expectations in terms of market share and profitability, which was quite strong in the seasonal downturn period. Revenue was $72 million for the second quarter, a 12% sequential reduction, and up 41% year-over-year, as second quarter revenue fared much better than the midpoint of our expected seasonal decline. During the quarter, we strengthened our market position, winning multiple orders for valve and actuation projects. Our relationships with numerous EPCs and fabricators have contributed to growth as we successfully won several notable projects with key customers. We continue to expand our e-commerce sales, hitting a new quarterly high with a top 10 e-commerce customer, as we offer their users a simple-to-use customizable platform for ordering and approving MRO material. Market demand for products remains high and our supply chain team is working to manage lead times and to source and pre-position inventory at strategic locations to meet our customers' demand for projects and MRO day-to-day activity within a supply challenged environment. Our international segment revenue improved sequentially and year-over-year, excluding the impact of foreign currency headwinds, as Mark will talk about later, international second quarter revenue increased 19% year-over-year. We are starting to see improvement in international market conditions and activities increasing as we see our customers move forward with offshore investments as subsea tieback projects begin to take hold and FPSO projects materialize in Europe. Utilization of offshore drilling rigs are improving and day rates are increasing, expanding our opportunities to provide MRO and OEM rig equipment as current inventories are consumed through contracted offshore work. In the Middle East, we are seeing drilling and production investments expand. We also note increasing activity in Southeast Asian shipyards from jackup rig activations that require new equipment and consumable materials for loadouts. In Indonesia, activity is improving as brownfield activities in the downstream sector materialize as customers plan for 2023 shutdowns. In Latin America, we are seeing an increase in demand as NOCs began to unfreeze budgets and reactivate plant turnaround planning and maintenance programs related to offshore activity from drilling contractors. As discussed on the last call, we had ceased operations in Russia and are out of the country. We also reduced our country footprint in the international segment by exiting a country in Latin America and the Middle East, where our regionalized service model will help serve some of those customers from an export model going forward. Historical revenue from these closures represented about $4 million to $5 million in quarterly revenue. Moving to our DigitalNOW initiatives, digital revenue comprised 40% of our SAP revenue down slightly as a percent from the first quarter as our digital revenue grew 9% sequentially, slightly below the overall company growth. We continue to see success with our customer-centric digital dashboards, which have driven higher percentages of bill and material accuracy as compared to prior periods. The accessibility, transparency, and data have expanded the knowledge sharing with customers and is leading to improvements in overall efficiency and customer satisfaction. We successfully secured a multi-year integration services contract for a national oil company, leveraging our Mercury Asset Management solution. The software will manage data on the customer's installed valve population, and provide data on repairs, maintenance, and help streamline the ordering of parts or replacement units. And on the development side of our e-track product, we enhance the maintenance workflow within the software by sending automated maintenance reminders to subscribers. We expect this new feature to make it easier for our customers to plan the scheduling of maintenance work on assets with our DNOW service department and technicians. Now I'd like to spend a few minutes on capital allocation. As I mentioned earlier, during the second quarter, we closed on a U.S. process solutions acquisition and expansion to our Flex Flow horizontal rental pumps solution from 2021. This acquisition fortifies our pumps strategy and supplements our permanent installation base with additional rental H-pump solutions at a time when purchased equipment lead times are stretched and the criticality of equipment uptime is in high demand. In addition, our flex flow solution offers customers flexibility in disposing of the water collected as a byproduct of oil and gas production, with customers choosing between running these units to fit their budget as an operational expenditure or procuring permanent SWD units to capital expenditures. We offer both of these options. This acquisition meets our disciplined criteria of further differentiating DNOW in non-commoditized customer solutions at better gross margins and EBITDA flow-through dynamics. Regarding our M&A pipeline, we continue to work on a number of prospects to further drive inorganic growth. Pivoting from M&A, I want to highlight the separate announcement earlier today on our expanded capital allocation strategy describing our inaugural $80 million share repurchase program. This authorization reflects the board's confidence in DNOW's post-transformation significantly improved financial performance, superior balance sheet and our desire to allocate capital to our owners. Our substantial liquidity position and newly transformed earnings profile position DNOW with this ability to expand the options at our disposal for capital deployment among a continued priority for acquisitions and organic growth opportunities. This authorization expands our commitment to generating attractive shareholder returns without deviating from our disciplined approach to balance sheet management.

Thank you, Dave. And good morning everyone. Total second quarter 2022 revenue was $539 million, an impressive 14% increase or $66 million in growth over the first quarter of 2022. On a year-over-year basis, we saw a strong second quarter 2022 performance spearheaded by revenue growth of $139 million or 35% and elevated our EBITDA profitability to a record-setting 8.7% or $47 million for the quarter, an EBITDA level nearly 6x what it was one year ago on solid operational execution with improved gross margins. The U.S. revenue for the second quarter 2022 was $408 million, up 22% or $74 million sequentially, and up $112 million or 38% year-over-year on continued strengthening and rig count, persistent depletion of DUC inventory, and increased completions activity. Our U.S. energy centers contributed approximately 79% of total U.S. revenues in the second quarter, with our U.S. process solutions contributing the balance of 21%. Turning to Canada for the second quarter, revenue was $72 million, down $10 million, or 12% from the first quarter of 2022 as a result of typical seasonal breakup. However, it's worth noting that this quarter was the smallest second quarter pullback on record, thanks in large part to the enduring efforts of our excellent sales and operations teams executing and winning projects and additional business in the market, which also translated into year-over-year second quarter revenue increase of $21 million or up 41%. International revenue in the second quarter of 2022 was $59 million, up $2 million, or 4% from the first quarter. When excluding the impact from foreign currency exchange rates, second quarter international revenue increased 7% sequentially as the stronger U.S. dollar relative to foreign currencies unfavorably impacted sales by approximately $2 million compared to the first quarter of 2022. Year-over-year second quarter international revenue increased 11% or $6 million. When excluding the unfavorable impact from foreign currency exchange rates, year-over-year second quarter international revenue increased 19%. As Dave highlighted earlier, our second quarter gross margins increased from the first quarter by 110 basis points to 23.7%. And again, outpacing the 21.9% full year record margins set in 2021. Warehousing, selling and administrative or WSA for the quarter was $89 million, up $5 million sequentially. About half of the WSA sequential increase was expected and discussed last quarter as we emerged from a first quarter that recorded lower healthcare costs and fewer payroll days, with the remaining increase primarily tied to variable compensation as we exceeded expectations by delivering significantly improved financial performance. Looking back one year ago to the second quarter of 2021, we have grown quarterly revenue by $139 million, yet only added $4 million in quarterly WSA cost for about 3% of the revenue increase. The strategic decisions and efforts by our dedicated and talented employees are materializing in our performance as we successfully increase productivity throughout our network while significantly growing revenue. And as of June 30, 2022, we substantially completed the liquidation of certain foreign subsidiaries in Latin America, the Middle East and Russia. These liquidations resulted in a customary one-time reclassification of $10 million in foreign currency translation losses, a component of our accumulated other comprehensive income and loss to the P&L in the quarter. This non-cash charge is presented within the impairment and other charges line in our income statement and excluded for non-GAAP reporting. In the second quarter, the U.S. contributed $32 million in operating profit or approximately 8% of revenue. The highest reported profitability percent for the segment on record. Canada delivered $6 million in operating profit or approximately 8% of revenue, also a record in absolute profit dollars and percent and looking back at each of the second quarter breakup periods since being public. The International segment reported $9 million in operating loss as a result of the non-cash $10 million charge related to the 2Q reclassifications of accumulated foreign currency translation losses related to those liquidations I discussed earlier. Moving below operating profit. Other expense in the second quarter was $1 million and the same as the corresponding period of 2021. GAAP net income for the second quarter was $26 million or $0.23 per share. And on a non-GAAP basis, net income excluding other costs was $29 million or $0.26 per share. On a GAAP basis, the effective tax rate for the three and six months ended June 30, 2022 were 7.1% and 8.2% respectively. This GAAP effective tax rate as calculated from the face of the income statement is below the typical effective tax rate at these earnings levels primarily related to the favorable tax benefit impact from changes in the tax valuation allowance on our deferred tax assets. When imputing our non-GAAP tax rate, we exclude such tax benefit, and the non-GAAP effective tax rate is closer to approximately 28% for the first half of 2022 and 28% of pretty good proxy for the effective tax rate for the second half of 2022 when excluding other costs. I'll go a little deeper on the tax provision this quarter and start off with a background refresher. At year-end 2015 we established a full valuation allowance on our deferred tax assets for GAAP reporting purposes. As there was a technical evidence that we may not materialize our deferred tax assets in the future. Since establishing this valuation allowance for GAAP, we have not recognized the tax benefits stemming from any operating losses. On a non-GAAP basis, however, in our adjusted net income and EPS reconciliation schedules, we have consistently excluded the impact of the change in the valuation allowance on our non-GAAP earnings, and we've recorded the income tax benefit in non-GAAP other costs in prior periods of losses. With our strong earnings posted through the second quarter of 2022, we are starting to consume our deferred tax assets in the U.S. So on a GAAP basis, we are not recording tax expense on our current U.S. earnings due to an equal and offsetting reversal of that valuation allowance. However, on a non-GAAP basis, we are recording income tax expense since we continue to exclude the impact of changes in our valuation allowance on our non-GAAP earnings. You will see this added tax expense for non-GAAP highlighted in our supplemental GAAP to non-GAAP reconciliation footnotes in our earnings release. It's important to note that while the tax expense we are accruing on a non-GAAP basis does impact our EPS excluding other costs, it has no impact on our near-term cash flow, as we do not expect to pay cash taxes in the U.S. this year or next, due to the buildup of net operating loss. Now moving to EBITDA, excluding other costs or EBITDA. For the second quarter, EBITDA was $47 million, or 8.7% of revenue, our highest since being public. The EBITDA to revenue flow-throughs of 29% sequentially and 28% year-over-year are a result of our team's execution and strategic focus across our new DNOW structure that make it easier for our team to provide exceptional service levels to our customers. Now moving to the balance sheet, we ended the second quarter in a net cash position of $232 million, including zero debt and zero drawers in the quarter, resulting in total liquidity of $574 million comprising the $232 million of cash on hand, plus $342 million in additional credit facility availability. Accounts receivable was $389 million, an increase of 14% or $48 million from the first quarter in line with the increase in customer activity. In this prolonged period of global supply chain constraints, we continue to meticulously source the products our customers require from our long-established and trusted partnerships with critical industry-leading manufacturers. This is the competitive advantage for DNOW and provides us the maneuverability and reliability our customers deserve. And our commitment to support our customers can be seen on our balance sheet this quarter, as we invested $35 million in additional inventory, while improving our quarterly inventory turn rate to 5.0x. Accounts payable was $290 million, an increase of only 4% from the first quarter of 2022. And driving most of the change in our working capital efficiency, with days payable outstanding, reducing six days or 9% sequentially. Cash used in operating activities during the second quarter was $29 million, primarily due to about a $70 million buildup in our working capital to support our customers' business activities offset with current period earnings. In the second quarter, capital expenditures were $6 million as we invested in infrastructure to enhance efficiencies and improve service levels to our customers. And as of June 30, 2022, working capital excluding cash as a percentage of second quarter annualized revenue was approximately 15%. And finally, as I hope you saw on our separate release issued this morning, our Board of Directors authorized the company's share repurchase program for up to $80 million of our common stock beginning today and continuing through and including December 31, 2024. Our substantial liquidity position and newly transformed earnings profile position the company with the ability to expand its options for capital deployment, among the continued priority for acquisitions and organic growth opportunities. The addition of a repurchase program to our capital allocation toolkit clearly demonstrates our strong belief that the market is currently undervaluing DNOW shares. To that end, we look forward to using this new tool in our broader capital allocation framework, repurchasing shares opportunistically when it makes prudent economic sense to do so. Our ongoing commitment to a stringent approach to balance sheet management remains unchanged by this strategy. We expect to apply a similar diligent approach to repurchase decisions as we do to balance sheet management and our ongoing capital allocation decisions.

Thank you, Mark. Now looking at our outlook, for the third quarter, we anticipate a sequential revenue increase in the mid-single digit percent range, a notable improvement from our previous guidance. We expect gross margins to return to the average levels seen in the first half of 2022, maintaining record highs. With the recent acquisition contributing to a full quarter of results and along with our investments in personnel and various projects aimed at enhancing future growth and productivity, we project warehousing, selling, and administrative expenses to rise by $2 million sequentially. I want to emphasize that the revenue percentage allocated to WSA in the third quarter will align closely with the historically low performance of 16.5% observed in the second quarter. We anticipate EBITDA dollars will remain flat to slightly decline in the low single digits for the third quarter. This is significantly better than the implied guidance from the previous quarter, while still representing record high levels. At this midpoint in the year, we are substantially increasing our full-year guidance, expecting 2022 to mark our highest percentage growth in revenue and strongest EBITDA percentage year to date. We now project full-year revenue to grow by up to 30% compared to 2021, with EBITDA approximating 7% of full-year revenue, reflecting a 420 basis point improvement from 2021 and contributing about $100 million in EBITDA dollars year-over-year. Despite expecting higher revenues than initially forecasted, we aim to generate positive free cash flow in 2022 while accounting for the timing impacts on our supply chain and anticipated seasonal pauses in the fourth quarter as our customers take a moment to recalibrate. In conclusion, I am excited about DNOW's transformation for the future and take pride in our record EBITDA achieved in the second quarter and the first half of the year. These results reflect the transformative two-year journey that the organization has made laying the groundwork for making this incredible turnaround indelible. I'm honored to serve alongside each of our highly talented women and men for inspiring one another and fostering an inclusive people-first customer-centric culture. We are singularly focused on delighting the customer every day as we win the market and pursue sustainable growth into the future. With that, let's open the call for questions.

Thank you. Our first question today comes from Tommy Moll of Stephens. Tommy, please go ahead. Your line is open.

Good morning, and thanks for taking my question.

You're welcome. Good morning, Tommy.

Dave, I wanted to start on gross margins. I believe the 24% you just reported was an all-time record since the IPO and also that it was probably a little bit above where you had even anticipated a quarter ago. So I wonder if you could comment on some of the upside drivers there in the second quarter. And then it sounds from the guidance like you might reset a tad lower in Q3 and if you could give us some of the drivers quantitative or qualitative there as well, that'd be appreciated?

Sure, sure. So in our last call, we talked about expecting full year gross margins in the 22% to 22.5% range. Of course, the second quarter was well above that, but of course, the guidance spoke to the full year. So we go through a process where DNOW happens to be in a very enviable position in its upstream focus. We're clearly number one in terms of distributors in the upstream space. So we have a priority with mills in terms of pipe availability and other types of products. And as we've talked about the last few quarters, we've been building inventory proactively, given the inflationary aspects of really all products consumer and business-oriented. So, we have a difference in our inventory value versus the street price for products we sell to our customers, and we enjoyed a really nice pop in the second quarter. We've been planning some projects, one large one that hit in the second quarter for about $9 million, that good margins again, because we had access to products and we kind of forethought the preposition of inventory to maximize gross margins in the short-term. It's been a campaign of ours to significantly improve gross margins. But we did benefit from those kinds of events culminating, but now we're seeing a bit of a convergence in supply and demand for pipes so we expect those margins to narrow a little bit, but we're still in the record realm. We still expect very strong gross margins in the second half, but we don't expect 23.7% to be the norm.

Yes, that's helpful. Thank you, Dave. You mentioned the two-year transformation journey you've been on. And that includes a lot of different areas gross margin, operating leverage others. I wonder, is it possible at this point, Dave, to talk to what kind of operating margin or adjusted EBIT margin is a reasonable goal here, as you move forward? I mean, we’ll start to think about 2023 or already have really, and what kind of incrementals are reasonable, assuming the market continues to grow? Is there any way to kind of wrap it all up and to where you might land through the cycle on a margin basis?

From an EBITDA perspective, we believe for the full year 2022 that will be at 7% EBITDA, that's a high watermark, that's well above anything we've produced in the past. Along those lines, we're trying to stand up a model that maximizes proximity to customers, and the efficiencies to deliver the products that they see the most value in. Meaning, we're going to find the product lines where we have the best positions in the best costing, the best potential for large gross margins, and will favor those and apply our resources, human capital, talent to those endeavors. So that's a main kind of focus for us. Now what is 2023 look like? That's of course, it's hard for us to say, we expect the market to continue to grow. We expect to strengthen our gross margins. We are enjoying - in the second quarter kind of, we call it a high watermark because we don't think that'll be the norm going forward. But we still have model improvements to make efficiencies to achieve. And the companies we're buying are all significantly higher gross margin businesses, significantly improved EBITDA. So, we expect to be in this 7% realm certainly in the near term, with goals to grow on that in future years. So that would probably be the starting point. Now, a year ago, I of course I would never would have forecast saying that 7% would be a standard for us. We generated, I think, last year 2.8% EBITDA after a really rough 2020 and we were very happy with those results. Now we're at 7% and we were hungry for more. So, that's kind of where we're at and where we're heading going forward.

Thank you. I appreciate it. Last one from me, just on the repurchase authorization. Can you talk to what the catalyst was to go ahead and make that announcement or rather for your Board to go ahead and make the decision now? And now that the decision has been made, how aggressive do you anticipate being at these levels?

Well, I think the catalyst was we see, for some time, our shares have been trading at a material discount to what we think the shares are worth. We've continued to improve our earnings profile. We have a pristine balance sheet. We thought there's more value in our stock. So, we're going to buy it at the appropriate time at the appropriate price. The catalyst was primarily that. We think we’re undervalued. In terms of the aggressive – the pace of buybacks, I think we're going to be opportunistic there. We're going to buy it at the right times, with a primary focus, which I want to make this point, primarily we're focused on acquisitions, to the extent organic opportunities are fully exhausted. So it's organic growth. And we've been really focused on that acquisitions as a primary capital allocation mode. And then share repurchases at the appropriate time to improve the value to our owners of the company. So, I think in terms of how aggressive we'll be, I think we're going to just be opportunistic. And we set an amount we think we can execute on fully and we intend to do that over the next couple of years.

Thank you. I appreciate it, and I will turn it back.

Yes, thanks for your questions.

Thank you. And our next question comes from Doug Becker of Benchmark Research. Doug, please go ahead, your line is open.

Thanks. Following up on the share repurchase, is it fair that this is going to be a tool used through the cycle and not just during a down cycle?

Yes, this is Mark, I agree. I think, we have this vehicle expiring in the end of 2024. And so, for us, it's just another tool in the toolkit. And so, the other thing I would enhance - what Dave mentioned earlier, is also the free cash flow generation, and a growth cycle for us historically, isn't positive, we're consumed by cash and growth cycles. So reaching these levels of growth and with the commitment to not need the liquidity to fund that growth in that way provides us the opportunity, to have this authorization. And clearly a growth period now, and you know on the counter-cyclical side of our cash flow, and what - if the market goes the other way, we generally generate tremendous amount of cash off the balance sheet as well. So really, this just becomes another avenue for us to evaluate the use of our liquidity. And so, organic growth that you've seen over the past several quarters we've been very intentional with the money there. Also looking at acquisitions, you know, when those multiples align and we see there's value there and the return, and as Dave highlighted the third element, which for us, it's highly flexible. Our share repurchase gives us that flexibility to be in the market when we think it's the right time to be in the market, but also be able to focus on inorganic growth with M&A.

Now it makes sense, and real positive, clear positive signal that generating ability of the company through the cycle. Speaking of cash, and maybe more specifically, free cash flow, wanted to get a little more color around your free cash flow assumptions in the back half of the year? And I guess, more specifically working capital, given the seasonal slowdown and maybe a more succinct way of summarizing. If there's growth in the fourth quarter, do we actually see free cash flow dipping negative modestly for the year?

Yes, that's a good question. And Mark might add to my answer. Almost every year, we see revenue decline in the fourth quarter, even in a strong growth, second half to 2021, we saw revenues decline. We think that, given the stresses in the market, and in the pace of growth this year, that we're going to experience that same kind of decline. And therefore, our customers, like I said, in my opening remarks, they have a chance to catch their breath, catch up old payables. And we can clean up our books that way, but we expect a slight dip. Now, if it went the other way, then it would strain our ability to generate free cash flow in that period. But so we - but the offsets to that would be we've been building inventory. And we've been adding a lot of inventory I think that pace will decline a little bit. So the prospects are still pretty good. We said on the last call, we would consume cash in the first half, we still think it's a good shot that will generate free cash flow in the second half, primarily in the fourth quarter.

Maybe jumping to international growth for next year, some of the large service companies about 15% give or take growth. We're seeing offshore pick up and you alluded to some of the increasing number of projects. And is it reasonable to be thinking about international growth for DNOW double-digits next year? I know it can be very lumpy, but everything seems to be lining up pretty nicely for that business?

Yes, Mark go ahead.

Yes, no I would agree. I think the print, and what we're seeing in activity, lends itself to another year-over-year growth in the international segment. So certainly exciting to see we're well positioned there, and I would agree, I think it's double-digits. I mean, it's early for next year to fully guide, but it feels right. It feels like there's a lot of opportunity and optimism for the international market next year.

Thank you.

Thanks, Doug.

Thank you. Our next question goes to Nathan Jones of Stifel. Nathan, please go ahead, your line is open.

Good morning, everyone.

Good morning.

Good morning.

Just wanted to follow-up on gross margins, obviously benefited a little bit from having low-cost inventory versus spot prices, you've seen some of the prices come down, particularly on steel, what are the risks or what do you see as the risks of maybe a quarter or two, where you end up with higher-cost inventory versus the spot price on the street, and we see a little bit of pressure on gross margins?

That's something we're watching closely. I don't think we're close to that convergence of price and cost, but we are seeing the cost of pipe coming up. But we still have a margin for selling that pipe at a profit, obviously. So that's something we watch for. And when we're planning inventory purchases, as to what's happening to the price and the customers willing to pay versus our cost to acquire that inventory. And we still have very healthy margins here. We expect that to continue, at least for the next several quarters.

Great, I'd also be interested in hearing a little bit more about the WSA investments that you're looking to make in the third quarter and going forward. I guess the investment in people is probably just adding heads. If not, I'd love to hear about it. But particularly interested in hearing about the technology investments that you're looking to make what kind of efficiencies do you think that's going to generate? How it better sells to customers, et cetera?

Okay, so I'll start off there. If you look at where we're at today, in terms of last year, headcounts are actually down 75 people probably today versus a year ago. Some of that's intentional and most of that's unintentional. You know, it's difficult to find people in this environment, everyone's experiencing that. What we're facing is increased base wages due to the great resignation that affects us quite a bit. I think that's pretty universal. We've seen bonuses and variable compensation increase significantly, because we're performing very well in terms of operating profit performance. We resumed our 401(K) in 2022, that kind of added cost as well. And now we're investing in training and technology, which Mark can talk a little bit about. But basically, it's been variable comp cost driving the biggest changes because we've achieved efficiencies in the business. But some of the kind of universal impacts from the great resignation have been felt, I think, pretty broadly in the industry. Mark, do you have anything to add to that?

I think two years ago, we talked a lot about working to get our costs to revenue in line and finding ways to become more productive as a business. And really, the downturn required that and we're kind of upping our investment here in the second half of the year on similar initiatives to continue to make our employees and our customers' lives easier to do business with us. And so, some of that is internal software, investments in technology, and also some processes that that help really remove errors and make it easier to do business. And so, you'll see some of that investment come in, in the second half of the year. Because as Dave says, we're not finished fine-tuning the model. And we certainly have the liquidity to invest organically. And we're going to do that here in the second half.

Thanks for that. Just one quick one on M&A. Typically at this point in the cycle, you find prices going up sellers' expectations getting pretty high. I know you did a small deal in the second quarter. Is there much out there that provides good value at this point in the cycle for you or should we expect the pace of M&A to be pretty slow here?

Well, I think we are seeing greater interest from sellers and we're - while we're always actively engaged in possible deals. We could - the number and the innings in some of these deals is just further along because there's an interest in selling. Interest rate increases are probably part of that inflation, some of those things that affect the seller, they may want to – and the strengthen the market the market strong. So people want to sell, this is a good time to sell given those other factors. So now I said on our last call, we'd probably do a couple of deals this year. And we're looking to do more than that. That's always subject to change. But the size of the deals we're looking at again, the bigger the harder to conclude, is increasing. And the number of conversations we're having is probably the highest it's been in the last six quarters. So that's always a wait and see kind of thing, we're very active in finding companies that are going to be durable, they're going to be profitable through a cycle. There'll be favorable in terms of working capital drag on revenue, free cash flow, gross margins, EBITDA margins, et cetera. So that's a big focus for us. Each of those needs to be better additions than our overall base business, which is improving substantially. So to me, the rate of interest or the interest by sellers is up there and it's making a lot of conversations and prospects for DNOW.

Great, thanks for taking my questions.

Thanks, Nathan.

Thank you. Ladies and gentlemen, we have 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 closing statements.

I'd like to thank everyone for calling in today. And we look forward to talking to everyone again in November. Have a good quarter. Thank you.

Thank you, ladies and gentlemen, this concludes today's call. Thank you all for participating in today's conference. This concludes our event, you may now disconnect.