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

Well, thank you, Rob. Good morning, and welcome to DNOW's second quarter 2024 earnings conference call. We appreciate you joining us, and thank you for your interest in DNOW. With me today is David Cherechinsky, President and Chief Executive Officer; and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the DNOW brand, which is also our New York Stock Exchange ticker symbol. Please note that some of the statements we make during this call, including responses to your questions, may contain forecasts, projections, and estimates, including, but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on limited information as of today, August 7, 2024, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest Forms 10-K and 10-Q that DNOW has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental financial and operating information may be found within our earnings release on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP, you'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA, net income attributable to DNOW Inc. excluding other costs, and diluted earnings per share attributable to DNOW Inc. excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. Please refer to a reconciliation of these non-GAAP financial measures to its most comparable GAAP financial measure and the supplemental information available at the end of our earnings release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the second quarter of 2024. A replay of today's call will also be available on our website in the next 30 days. We plan to file our 2024 Form 10-Q for the second quarter later today and will also be available on the website. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. Before I talk about the business, I'd like to recognize the perseverance of our employees through the disruption caused by two recent storms, the Derecho thunderstorms in May and the more recent Hurricane Beryl in July. Both storms directly impacted many of our employees, causing widespread loss of power and destruction of personal property. Without hesitation, our DNOW employees selflessly stepped up, extended a helping hand, and supported one another and our communities. I'm impressed with the way we came together to help one another in a time of need. This collective response is emblematic of DNOW's culture and brings me a great deal of pride. In that same spirit of teamwork and community, in the first quarter, we joined forces with Whitco Supply, tapping into a talented team with strong leaders and technical expertise who earn deep affection from their customers. Their supply chain design, strength in midstream, world-class sales team, and keen focus on customers piqued our interest when we pursued that combination. The Whitco people and culture were a natural fit with how we've transformed DNOW to live and breathe those same cultural attributes. During these last six months, it's remarkable to see the deep esprit de corps and cultural alignment our team shares, elevating DNOW to expand our value and reach in the market to help fuel greater success together. In terms of highlights for the quarter, there were many. We produced strong earnings, having grown revenues organically in the second quarter despite headwinds. We grew our legacy midstream business coupled with the onboarding of Whitco, where we have more than doubled our midstream coverage. We are seeing success along our trek to double our energy evolution sales in 2024, a key element of our long-term strategy. We generated inventory velocity of five turns in the quarter, a high mark which is even harder to do in a slowing market. We drove the best days sales outstanding we've seen since 2020, and we produced cash when we expected to consume it given a substantial cash-generating first quarter. And with our quarter execution, we more than funded the share repurchases we made in the quarter. This is great execution by our teams. And now, moving to our results. The strength in our second-quarter performance was evident against the combination of headwinds from lower gas prices, lower U.S. rigs and completions, and the unfavorable impact from the seasonal breakup in Canada. Second quarter 2024 revenue grew sequentially $70 million, or 12% from Whitco's full quarter contribution combined with growth in International and in our legacy DNOW U.S. Energy Centers and Process Solutions businesses. We generated $50 million in EBITDA for the quarter. Strong bottom line performance, which was aided by $2 million in favorable items not expected to recur in the third quarter. We generated $18 million of free cash flow during the quarter, bringing the year-to-date amount to $98 million and our trailing four quarters free cash flow totaled $201 million. In North America, onshore oil and gas activity in the U.S. is more challenging than in recent times due to exploration and production consolidation, low natural gas prices hampered further by a lack of natural gas takeaway infrastructure, LNG export capacity, and political posturing. Yet, we are focused on opportunities where we see growth and one area we've been focused on is midstream. Our Whitco acquisition further expanded our business in the midstream market, a sprawling, geographically diverse network of LACT units, pumping stations, metering skids, and pipes, valves, fittings infrastructure, one that is aging and undersized for current and future demands. The midstream market vertically complements our upstream offerings and strengthens our partnership with and importance to the key manufacturers we support. This market provides a steady diet of day-to-day maintenance, repair, and operations business combined with a buffet of capital projects aimed at debottlenecking upstream capacity constraints through the expansion of midstream infrastructure with demand pulled through expanded export opportunities for crude oil, refined products, and LNG. We remain excited about growing opportunities in the energy evolution space, where we are seeing more use cases of CO2 and expanded enhanced oil recovery combined with an increasing backlog of CO2 storage permit submissions to coincide with capital investments in carbon capture, utilization, and storage. Direct air capture technology remains promising, currently contributing to our revenue profile as we expect more units to be constructed to reduce the atmospheric concentration of CO2. And in the renewable gas and natural gas sector, our patented process technology from our EcoVapor business offers biogas and landfill gas operators the ability to treat their waste gas by removing oxygen, sulfur, and excess water to meet pipeline transfer specifications. We are making progress in expanding our industrial adjacent markets with increased participation in the mining sector in municipal water and chemicals markets. These target markets align well with our service areas, our current product lines, and present new demand for our process solutions, pump packages, mechanical seals, and field service capabilities. On the International front, with industry experts forecasting continued capital investment and growth and activity in regions like the U.K., Norway, Netherlands, Australia, and the Middle East, we believe there is opportunity to improve the profitability of our International business as we strategically increase our focus on specific locations, products, and solutions to provide the greatest value to our customers.

Thank you, Dave, and good morning, everyone. Total second quarter 2024 revenue was $633 million, up 12% or $70 million from the first quarter of 2024. EBITDA, excluding other costs or EBITDA for the second quarter was $50 million, or 7.9% of revenue. U.S. revenue for the second quarter 2024 totaled $512 million, a $77 million increase or 18% higher than the first quarter of 2024. Year-over-year U.S. revenue increased $56 million or 12% from the second quarter of 2023. The U.S. sequential revenue increase was driven by the full quarter contribution of Whitco paired with U.S. growth in both Energy Centers and Process Solutions in the quarter. U.S. Energy Centers contributed approximately 74% of total U.S. revenue in the second quarter, and U.S. Process Solutions contributed approximately 26%. In Canada, for the second quarter, revenue totaled $56 million, a decrease of $10 million, or 15% from the first quarter of 2024, as expected due to seasonal breakup. International revenue for the second quarter of 2024 was $65 million, up $3 million, or 5% sequentially, primarily from projects in the Middle East not expected to repeat in the third quarter. Gross margins declined 110 basis points from the first quarter of 2024 to 21.8%, with about half the change attributable to declining steel pipe prices, product and project mix, and competition intensity, and the other half primarily resulting from the impact of acquisition purchase accounting flushing out in the second quarter for inventory step-up to fair market value. Warehousing, selling and administrative, or WSA, for the quarter was $105 million, up $4 million sequentially, primarily related to the Whitco full-quarter contribution, partially offset by approximately $2 million in favorable WSA quarterly impacts not expected in the third quarter. We forecast the third quarter WSA level to approximate $107 million and could lower towards $103 million in the fourth quarter. In the second quarter, we reported $9 million of depreciation and amortization expense, and for the third quarter 2024, we forecast depreciation and amortization to be approximately $8 million. Now, moving to operating profit. In the second quarter, total company operating profit was $33 million. Respectively, the U.S. generated $28 million, Canada delivered $2 million, and International contributed the remaining $3 million in operating profit in the second quarter of 2024. Interest income in the period was $1 million. Now, moving to income taxes. In the second quarter of 2024, DNOW's income tax expense was $8 million and $16 million year-to-date. Our effective tax rate, as computed on the face of the income statement was 25.8% year-to-date 2024. We estimate our 2024 full-year effective tax rate will be approximately 27% to 28%. From a cash income tax perspective, we're not expecting to pay U.S. federal cash income taxes in 2024 due to available net operating loss carryforward. Net income attributable to DNOW Inc. for the second quarter was $24 million, or $0.21 per fully diluted share. And on a non-GAAP basis, Q2 2024 net income attributable to DNOW Inc. excluding other costs was $28 million, or $0.25 per fully diluted share. Moving to the balance sheet. At the end of the quarter, we had a cash position of $197 million and zero debt. Cash increased by $9 million in the second quarter, driven by our cash generation from operating activities, partially offset by stock repurchases in the quarter. We ended the second quarter with total liquidity of $579 million, comprising our net cash position of $197 million and $382 million in additional credit facility availability. Our existing $500 million revolving credit facility extends into December 2026, providing DNOW with immediate access to capital under the facility. Ending accounts receivable was $403 million, a decrease of $7 million from the first quarter. Days sales outstanding, or DSO, was 58 days at the end of the second quarter, the lowest level since the fourth quarter of 2020. And inventory was $399 million at the end of the quarter, a decrease of $29 million from the first quarter, with a quarter annualized turn rate of 5.0 times. Accounts payable was $278 million at the end of the second quarter, a decrease of $61 million from the first quarter, primarily based on the timing and volume of inventory purchased in the period. And for the second quarter of 2024, working capital, excluding cash as a percentage of annualized second quarter revenue was 16.4%. The second quarter cash provided by operating activities was $21 million and $211 million for the trailing four quarters ending June 30, 2024. We invested $3 million in capital expenditures in the second quarter of 2024, bringing our second quarter free cash flow to $18 million. We continue to execute on our share repurchase program that is authorized through December 31, 2024 and repurchased $10 million under the program in the second quarter. As of June 30, our cumulative repurchases under our $80 million authorized share repurchase program totaled $67 million. Our commitment to growing the company through accretive, organic and inorganic growth remains a key priority while also having the ability to repurchase shares opportunistically as we use the tools in our capital allocation framework to generate attractive shareholder returns without deviating from our disciplined approach to balance sheet management. We continue to be debt-free to keep cash flow generation a top priority.

Thank you, Mark. Now, switching to our outlook for the third quarter and full year 2024. In the U.S., we expect activity to be lower sequentially as U.S. operating rigs and completions are expected to be muted due to weak gas prices in addition to customer budget throttling and tentativeness around upcoming U.S. elections. In Canada, we expect growth from the second quarter as more favorable weather patterns afford increased activity. Internationally, we expect activities to be lower sequentially due to project timing. Taken together, we expect DNOW's third quarter sequential revenues to be flat to down 5% from Q2 '24 with EBITDA to approximate 7% of third quarter revenues. And for the full year 2024, revenue could increase in the low-to mid-single-digit percentage range compared to full year 2023, and our 2024 full-year EBITDA percent could approximate 7% to 7.5% of revenue. Free cash flow for 2024 could approach $200 million. We have a legacy of supporting our customers for the past 160 years, and the long-term outlook remains strong as we are positioned to capitalize on market opportunities despite slowing activity, advantaged by the solutions we offer today, underwritten by our strong balance sheet. Our priorities are, first, to finance and seize organic growth; second, to execute on strategic and tuck-in margin-accretive acquisitions; and third, to opportunistically repurchase shares, a program which we intend to complete by year-end. We will invest and grow our core market, capture additional revenues from the growth in investments tied to energy evolution, and diversify our customer base by targeting revenue from additional industrial markets while driving efficiencies across our business. And finally, I'd like to close with where we began with our employees. I was fortunate to spend a couple of days in Wyoming at one of our brightest growth locations. We opened a new facility situated in the heart of the town, designed with a customer focus set up for educating our customers on the products and services we provide. At the grand opening, we had over 130 customers, suppliers, employees, the mayor, and the town council; a true community event. One of the council members, a fan of our team, shared some of his thoughts about who we are. Some of the sentiments shared, which speaks to our culture as a whole, include to be leaders requires creating lasting partnerships with our customers, our communities, and our suppliers. The steadfast force keeps the wheels of each of our local industries and communities turning and fusing the lifeblood into our local communities and our company. We cherish, admire, and celebrate our employees who are dedicated, skilled, and passionate to delight the customer, who work tirelessly to help solve complex challenges. Our employees do more than sell steel products and the components to help our customers extract, gather, transport, process, and market traditional and new energy to the world. Our employees build bridges. Bridges that span not only between businesses but also between innovation and tradition and between aspirations and achievements. We are building our bridge to the future and the solutions we offer today forge the promise of progress, the resilience of our communities, and the spirit of collaboration. We are architects of possibility, engineers of growth, partners for sustainability, and stewards of lasting impact. For all the women and men of DNOW, our opportunities are abundant to take DNOW to a bright future and to build bridges that connect the reality today to the promise of tomorrow. With that, let's open the call for questions.

Your first question comes from Nathan Jones from Stifel. Your line is open.

Good morning, everyone.

Good morning, Nathan.

Good morning.

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

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

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

I believe there are several factors worth noting. For starters, oil demand is on the rise, which we see as beneficial for us. Additionally, we anticipate growth in export LNG opportunities in 2025 and 2026, and we are well-positioned to take advantage of this. There seems to be some hesitation related to the U.S. elections, but once a decision is reached by voters, we expect that hesitance will diminish. Moreover, gas futures are projected to be in the $3 range, providing us with an advantage next year. Many anticipate that interest rate cuts are on the horizon, which could stimulate the economy. Although steel prices have been declining for some time, we are starting to hear from manufacturers about longer lead times and increased utilization rates. This suggests a tighter supply, allowing us to manage our supply chain more effectively than most competitors. Furthermore, energy evolution remains a crucial element of our long-term growth strategy, and we are making significant progress in this area. Last year, our energy evolution sales reached approximately $30 million, and we expect that figure to potentially double this year. These factors contribute to our confidence as we head into the next year.

Okay. Thanks for taking my questions.

You're welcome.

Your next question comes from Jeff Robertson from Water Tower Research. Your line is open.

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

I did, Jeff.

Do you have any insights based on your observations from projects or customer inquiries about where that might lead in 2025?

We don't have that information right now. What we're observing is a significant increase in quotes, indicating a growing interest in budgeting and similar areas. We're also seeing an uptick in orders, which we expect to convert into sales in 2024. However, we're not yet certain about how this will translate or the timing for 2025.

With respect to revenue per rig, revenue per rig was about $1.5 million in the second quarter of 2024. It appears that in the U.S., it was quite strong. Are you observing any market share gains in the U.S.? Additionally, regarding consolidation, do you believe that as companies merge and potentially adjust their supply chain management practices, it leads to market share gains or possibly increased wallet share gains with some of your customers?

Yes. We are starting to notice that as our economy in the oilfield sector is slowing, some of our smaller competitors, who we regularly compete with, are becoming more cautious. They are making cuts and liquidating inventory. At the same time, our larger customers are consolidating, and only a few distributors have the capability to meet their product needs, pricing structures, and geographic coverage. We believe this situation benefits us. However, during this period of consolidation, there is a hesitation about roles and responsibilities, leading to project delays and deferrals. We think we are currently experiencing this but expect it to improve in the upcoming quarters. We believe we are gaining market share, and in the long run, these customer consolidations will work to our advantage, and we aim to be ready to take advantage of it.

With the Whitco acquisition in mind, are you noticing increased activity as midstream companies seek to alleviate issues in the gas network? Recently, Waha gas in West Texas had significantly negative pricing, indicating that a substantial amount of gas appears to be stranded from a market perspective. Do you anticipate this driving activity in 2025 and 2026?

Yes, Jeff. This is Brad. I'll respond to that, and perhaps Dave or Mark can provide more details. We're definitely observing challenges in moving associated gas produced in the Permian to the Gulf Coast market, particularly with Waha prices falling below $1. Recently, there have been announcements aimed at alleviating the significant amount of associated gas and improving takeaway capacity, though adding this capacity may take one to two years. The Matterhorn pipeline has experienced some delays, and there have been additional setbacks with LNG export capacity, especially concerning Freeport LNG. In the next six to twelve months, we anticipate some relief. The main question is whether the dry gas basins will come back into play and if we can transport dry gas from the Haynesville to the Gulf Coast markets, as well as increase takeaway capacity from the Permian and Eagle Ford to the Gulf Coast. We believe demand for gas is well-positioned for LNG exports in the long term, and DNOW is strategically placed to benefit from the midstream sector through our legacy business and Whitco. We have many basins covered with our current service model and access to new customers. Additionally, we hope to see more LNG relief from Canada’s West Coast in the coming years. Overall, we are optimistic about the long-term outlook, but in the short term, we are working to ease congestion and find additional takeaway capacity to drive demand for natural gas.

Thanks, Brad.

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

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

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