DNOW Inc. Q1 FY2025 Earnings Call

Good morning. My name is Jeanine, and I will be your conference operator for today. I would like to welcome everyone to the DNOW First Quarter 2025 Earnings Conference Call. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Well, thank you, Jeanine, and good morning and welcome to DNOW's first quarter 2025 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 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 the outlook of the company's business. These are forward-looking statements within the meanings of the U.S. federal securities laws based on limited information as of today, May 7, 2025, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest Forms 10-K and 10-Q that DNOW has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information, as well as supplemental financial and operating information, may be found within our earnings release or on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information regarding our results as determined by U.S. GAAP, you will note that we disclose various non-GAAP financial measures in our earnings press release and other public disclosures. Those non-GAAP financial measures include earnings before interest, taxes, depreciation, amortization, or EBITDA, excluding other costs, EBITDA excluding other costs as a percentage of revenue, net income attributable to DNOW Inc. excluding other costs, diluted earnings per share attributable to DNOW Inc. stockholders excluding other costs, and free cash flow. Please refer to a reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measures 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 first quarter of 2025. A replay of today's call will also be available on the site for the next 30 days. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I'd like to start by acknowledging the solid execution by our team in the first quarter of the year. Their grit, perseverance, and passion, not just for today, but for playing the long game and doing the things today that ensure the enduring success of DNOW inspires me. Thank you for everything you do to support our suppliers and delight our customers. The first quarter of 2025 represents the second-best first quarter EBITDA results in our public company history at $46 million, up 2% sequentially and up 18% year-over-year. For reference, the actual record quarter for first quarter EBITDA was 2023 at $47 million in a period then where we had 29% more active rigs and 18% more new wells completed. I make that reference to illustrate the resilience of the continued earnings power produced by our team. Again, this is notable given the misunderstood perception that the upstream sector alone drives opportunities for DNOW. In the quarter, we delivered top-line growth both sequentially and on a year-over-year basis, beating our February guidance despite headwinds from a slow start to the year, coupled with flat U.S. rigs and lower U.S. completions. Revenue for the first quarter was $599 million, up 4.9% from the fourth quarter and up 6.4% year-over-year. Gross margins remained resilient at 23.2%, better than expected in the first quarter. EBITDA as a percentage of revenue was 7.7%, beating our first quarter target and demonstrating continued earnings strength. We are focused on opportunities that drive accretive margins while diversifying our market mix. We continue to execute our strategy to invest in and grow our core market, capture additional revenues from energy evolution opportunities, and diversify our customer base by targeting and realizing revenue from adjacent industrial markets while driving efficiencies across our business. With our current liquidity and capital allocation framework, we have the ability to strike deals at the right time and repurchase shares opportunistically, thus balancing the growth of our business with a return of capital to produce sustainable long-term value for our shareholders. In April, we closed a small but important international acquisition, which provides industrial lighting and electrical bulk materials to the energy and industrial end markets in Singapore and in the Asia Pacific region. The acquisition is complementary to and further strengthens and expands our MacLean International brand, where we have the same electrical manufacturer distribution agreement in the U.K. and Australia, allowing for increased revenue synergies with this key manufacturer and further positions MacLean to capture more market share. Moving to share repurchases. Under the new upsized $160 million program authorized earlier this year, we have purchased $16 million in shares to date. Before I move to our results on a regional basis, I'd like to take a moment to comment on tariffs, some macro uncertainty and the impact on DNOW. As you are aware, the tariff situation is dynamic. As a point of reference, following the first round of tariffs in 2018 and supply chain disruptions faced in 2021 and 2022 in the wake of the COVID-19 pandemic, our supply chain and sourcing teams have repositioned our supply and increased sourcing from domestic producers, reducing our dependence on international sources. Today, in our U.S. operations, our rough estimates are that around 70% of the products we sell are sourced domestically, leaving the remaining products sourced internationally. South Korean, Indian, and European supply make up the majority of the directly imported product. DNOW directly imports a negligible amount of products from China, less than $1 million per year. Approximately 20% of our U.S. operations supply for inventory has some exposure to China, mostly raw materials. Neither DNOW nor our key suppliers have dependency on Chinese imports for pipe, fittings, and flanges, inclusive of raw materials and semi-finished materials. DNOW valve and pump manufacturers range from 100% U.S. made to varying percentages of critical components to 100% Chinese made. Manufacturers exposed to Chinese-specific tariffs have begun altering supply chains and diversifying outside of China. In response to this, we are taking the following actions to mitigate the impact and protect our margins. We are passing supplier cost increases through as quickly as we can. We are updating our pricing structures to reflect increases as they occur. We are working with our key suppliers to ensure adherence to advanced notification clauses in our agreements. We are using our purchasing power to continue to multi-source key commodity product lines to help our customers. We are working closely with our customers on project materials to solidify commitments ahead of procurement. And we are analyzing alternate manufacturers for qualification to our approved manufacturers list. DNOW has the scale, systems, processes, and talent with experience to execute our inflation period playbook. Our suppliers are actively managing this evolving situation alongside us. In conclusion, DNOW is better positioned to navigate these challenges and seize opportunities related to tariff impact. Now, some comments on a regional basis. In the U.S., revenue was $474 million, up $23 million or 5% sequentially. Growth was driven by a full quarter contribution of our fourth quarter Trojan acquisition and increased midstream demand, most notably from our Whitco business. In midstream, we are seeing demand to support continued debottlenecking of midstream takeaway capacity combined with operators' investments in gathering assets. As a result of softening in some areas, we continue to exercise our self-help initiatives by optimizing our branch footprint, leading to some location closures. As we look into the second quarter, we will continue to drive incremental expense savings as we adjust our model to the market, investing in areas of growth and pruning underperforming areas. In U.S. Process Solutions, revenue increased sequentially from a full quarter of the Trojan business and due to higher demand for our suite of products and services. Growth was driven by demand for Odessa pumps packages, aftermarket service and Trojan rental equipment. Activity remains strong for our Power Service and Flex Flow business, while EcoVapor experienced a decrease due to project timing variations as expected. Our Flex Flow and Trojan rental fleets saw increased demand due to some operators favoring leasing over purchasing to support their maintenance production. Given the rental nature of this business, these are higher-margin product lines, and revenue should increase to the extent customers cut CapEx, another example supporting our resilient business model. We delivered our first power distribution center, or PDC, for a midstream company. This newly engineered unit is a turnkey 16x50-foot packaged unit, an insulated building, including variable frequency drives, panel boards, transformers and HVAC units. We expanded our pump product lines by signing new distribution agreements with a lobe style and vertical slack style pump manufacturer, which expands our addressable market in the produced water transfer and industrial end markets. During the quarter, we commissioned our first horizontal H-pump rental for a liquid CO2 recycle transfer application in an enhanced oil recovery operation for a Permian operator. The performance exceeded customer expectations and expanded our application capabilities for the rental fleet. As part of our Sable Automation Solution, we successfully commissioned a water recycling facility for a leading national egg producer. This system ensures consistent delivery of high-quality water and nutrition in poultry feed, ultimately enhancing egg production. We launched our new Tank Commander EcoVapor product, which addresses the needs expressed by several of our customers. This unit is a vapor management system designed to capture 100% of tank vapor and eliminate venting emissions, thereby enhancing the value of oil and gas assets. This innovation combines our ZerO2 technology with an automated system to control storage tank pressures, allowing operators to sell valuable high-BTU tank vapor gas and reduce Scope 1 emissions. In Canada, revenue was $62 million for the quarter, down $4 million sequentially as a $4 million project from 4Q did not repeat. And in International, revenue was $63 million, sequentially higher by $9 million, or 17%, primarily due to increased project activity with a $15 million project in 1Q not expected to repeat in the second quarter. For DNOW, the energy evolution includes activity primarily associated with carbon capture utilization and storage, direct air capture, hydrogen, and renewable natural gas or RNG-related projects. Throughout the quarter, we successfully delivered a range of PVF+ and EcoVapor products for various projects encompassing CCUS, hydrogen and RNG end markets. Regarding capital investments and expansion in data centers to support AI growth, DNOW is positioned to participate in several areas. First, for data centers powered from natural gas, we see growth opportunities in construction of midstream transmission lines to supply natural gas for our PVF+ products with many of the operators already being customers of DNOW. In the United States, our pumping solutions are being used in cooling systems alongside pipe valves and fittings from engineering, procurement and construction firms who design and build the data centers. And internationally, our MacLean operations in the U.K., Norway, Netherlands and now Asia Pacific are experiencing increasing bidding activity for our electrical cable supports, basket trade system supplies and lighting for data center projects as well. Moving to our DigitalNOW initiatives. Our digital revenue as a percent of total SAP revenue improved to 53% during the quarter, driving improved efficiencies through integrated systems. We are not only looking to grow revenues by selling our products in the construction of data centers, we are also deploying AI solutions to drive efficiencies in a number of internal processes across DNOW. One project we recently completed uses AI to index and upload manufacturer test certificates, which are provided along with the products we sell to customers. This project has taken a highly manual process, which is now powered by the use of AI and machine learning, processing up to 85% of requests without any action or manual intervention required.

Thank you, Dave, and good morning, everyone. Total revenue for the first quarter of 2025 was $599 million, up 5% or $28 million from the fourth quarter of 2024 and up 6% or $36 million from the first quarter of 2024, exceeding our guide from our February call. EBITDA, excluding other costs or EBITDA for the first quarter was $46 million, or 7.7% of revenue, up $1 million sequentially. The first quarter marked the 12th consecutive quarter where DNOW has delivered EBITDA at or above the 6.9% level and is the second highest EBITDA in our company history for first quarter performance. U.S. revenue for the first quarter of 2025 totaled $474 million, an increase of $23 million, or up 5% from the fourth quarter of 2024. Year-over-year, U.S. revenue increased $39 million, or up 9%. U.S. energy centers contributed approximately 69% of total U.S. revenue in the first quarter, and U.S. Process Solutions contributed approximately 31%. This quarter marked the highest revenue dollar contribution yet for U.S. Process Solutions, a new quarterly record. In Canada for the first quarter, revenue totaled $62 million, a decrease of $4 million, or 6% from the fourth quarter of 2024. International revenue for the first quarter of 2025 was $63 million, up $9 million or 17% sequentially, driven by higher project activity, as expected. Overall, DNOW gross margins for the first quarter were 23.2%, similar to the fourth quarter of 2024 and better than expected. Warehousing, selling and administrative, or WSA, for the quarter was $109 million, slightly better than our forecasted level of $110 million. This decrease was due to a focus on operational efficiencies and resource alignment activities. We estimate a similar level of WSA for the second quarter of 2025. Now, moving to operating profit. In the first quarter, total company operating profit was $30 million. The U.S. generated $22 million of operating profit, and Canada and International each delivered $4 million in the first quarter of 2025. Interest income in the first quarter was $1 million. And now moving to income taxes. In the first quarter of 2025, DNOW's income tax expense was $7 million, and our effective tax rate as computed on the face of the income statement was 23.3%. We estimate our 2025 full year effective tax rate to be approximately 26% to 29%. And from a cash income tax perspective, we are not expecting to pay material U.S. federal cash income taxes in 2025 due to available NOL carryforwards. Net income attributable to DNOW Inc. for the first quarter was $22 million, or $0.20 per fully diluted share. And on a non-GAAP basis, Q1 2025 net income attributable to DNOW Inc., excluding other costs, was $24 million, or $0.22 per fully diluted share. Moving to the balance sheet. At the end of the first quarter, we had zero debt and a cash position of $219 million. We ended the quarter with total liquidity of $567 million, comprising our net cash position of $219 million plus $348 million in additional credit facility availability. Our existing $500 million revolving credit facility extends into December of 2026, providing DNOW with immediate access to capital under the facility. Accounts receivable was $439 million at the end of the first quarter, an increase of $51 million from year-end. Days sales outstanding, or DSO, was 67 days at the end of the first quarter, up from the fourth quarter, partially due to the cadence of project deliveries in the quarter and a couple of customers working through system upgrades and conversions at quarter end. We expect improvements in the DSO picture next quarter. Inventory was $385 million at the end of the first quarter, an increase of $33 million from year-end, with an annualized turn rate of 4.8 times. In our most recent earnings call, we outlined our strategic approach to intentionally build our inventory levels as we start the new year. This decision was made to support our customers' growth while effectively navigating the challenges posed by tariffs. Our focus was particularly on the midstream and fluid management businesses, where we're seeing increased demand. Accounts payable was $329 million at the end of the first quarter, an increase of $29 million from the fourth. And for the first quarter of 2025, working capital, excluding cash as a percentage of annualized first quarter revenue, was 16.2%. In the first quarter of 2025, net cash used in operating activities was $16 million, better than expected as we build inventory to organically invest in the business. We generally consume cash in the first quarter, and in the first quarter, we invested $6 million in capital expenditures to support growth, primarily in Process Solutions. Over the last four quarters, we've completed a $114 million acquisition, generated $187 million in free cash flow, and converted over 100% of our EBITDA to free cash flow while returning, over the past four quarters, $30 million to our shareholders through share repurchases and increased our cash balance by $31 million. In January, we announced a new $160 million share repurchase program that is double our inaugural program that we completed in the fourth quarter of 2024. This new program enhances our ability to opportunistically return capital to shareholders as market and business conditions warrant, all while maintaining our focus on investing in accretive organic growth and strategic acquisitions while adhering to our disciplined approach to balance sheet management. In the first quarter, we repurchased $8 million of common stock. And so far in the second quarter, we have repurchased an additional $8 million of common stock, or $16 million year-to-date, or approximately 950,000 shares under the $160 million share repurchase program. Maintaining a disciplined approach to capital allocation remains a core priority. We continue to balance accretive organic and inorganic growth with opportunistic share repurchases, all while sustaining a strong and flexible balance sheet to drive long-term shareholder value. We continue to be debt-free, have no interest payments while keeping cash flow generation a top priority.

Thank you, Mark. Before switching to our outlook for the second quarter and full year 2025, I would like to revisit and make a few additional comments on the market. As I mentioned earlier, recent U.S. tariffs, together with retaliatory measures, have significantly contributed to market uncertainty. Furthermore, OPEC+ has targeted increased production levels, exerting downward pressure on global oil prices. The dynamics of this environment remain volatile, leading to fluctuations in market sentiment. Currently, we have not observed a notable impact on customer spending. In the U.S., we expect sequential second quarter growth driven by increased midstream activity and from key supply chain solution customer spend. We have seen an increase in gas rig-related activity in the area poised for some recovery. In Canada, expected seasonality will drive sequential revenue lower. Canada's revenue historically declines approximately 15% to 20% from the first quarter to the second quarter due to the second quarter breakup period where heavy equipment access to production areas is restricted. Internationally, we expect top line sequential decline of about $10 million due to $15 million in projects delivered in the first quarter that will not repeat. Taken all together, we expect DNOW's second quarter revenues to be flat to up in the mid-single-digit percentage range from the first quarter. On a full year basis, we are reaffirming our full year guidance for 2025 revenues to be flat to up in the high-single-digit percent range from 2024 levels, and full year 2025 EBITDA could approach 8% of revenue. And we are targeting free cash flow in 2025 of $150 million. In closing, following our second-best fourth quarter in history, we built on that and beat first quarter expectations with revenue growth of 5% sequentially to $599 million and delivered our second-best first quarter EBITDA of $46 million in a market with fewer operating rigs and completions. We executed adroitly on our capital allocation initiatives, closing on a small strategic acquisition in Singapore to expand our MacLean International offering. We repurchased $16 million of common stock on a year-to-date basis under our new $160 million share repurchase program while strategically adding inventory for organic growth ahead of the April tariffs, which should set us up favorably in this environment. We are uniquely well-capitalized with a significant cash balance and no debt or interest payments and can be selective and patient at the acquisition bargaining table while benefiting from our fortuitous inventory planning. While future market conditions are difficult to predict, given uncertainties stemming from the decline in oil prices and tariff-induced trade disruptions, we believe we are well positioned to seize organic, adjacent, and inorganic growth, pursuing more efficient and cost-effective ways to execute operationally. I want to extend my sincerest gratitude to the women and men of DNOW who distinguish us in the market in how we promote our key manufacturers and work tirelessly to delight our customers as we build upon a great start to the year. With that, let's open the call for questions.

Thank you. Our first question comes from Nathan Jones from Stifel. Please go ahead.

Yeah. Good morning, guys. This is Adam Farley on for Nathan. I wanted to start on tariffs. How is inflation tracking in the business? What product areas have seen the most tariff-related price increases from suppliers? And then, how should we think about how that impacts gross margin as we move through the year?

We've observed some significant changes in our inventory situation. Currently, inventory costs are low due to a couple of years of deflation, which means we're not fully accounting for the expected increases. We're starting to see normal inflationary pressures return as longer lead times emerge from some manufacturers, leading to typical price hikes. Additionally, tariffs are starting to add to this situation, although we haven't felt their full effects yet. Most of our recent cost increases stem from regular inflation rather than tariffs, but we are beginning to see some tariff effects in projects we are quoting. For many products we stock and sell, like pipe fittings and flanges, which make up about 40% of our revenue, the tariff impacts are minimal due to strong domestic production. However, for valves, the situation is different. We have significant U.S. production from key suppliers, but we're also importing some products where tariff impacts are starting to emerge. We've seen price increases ranging from 3% to 5% for some product lines, with others experiencing increases of 25% to 35%. This is a new development that wasn't apparent in the first quarter but will be reflected in the second quarter. We believe that overall, this will positively affect gross margins, although competitive factors may also play a role. At this stage, it's difficult to predict the exact extent of favorable gross margin increases, but we do anticipate benefiting from the increased costs of materials, even if the timing and degree of this remains uncertain.

Thank you, Dave. That's really helpful color. Just following up on that, as it stands today, are smaller competitors staying rational in the market, or is it more you expect maybe heightened competitive pressures going forward?

I think in terms of commenting on how other people are behaving in terms of pricing, I don't want to say too much about that, but I think people are being careful about their inventory. And they see that. We certainly see it. And I think most of our competitors see our inventory as a competitive tool or really a weapon depending on how much you have. The more you have right now ahead of the tariffs, the better. I think people are being careful, but there's still excessive intensified bidding on projects. So, I think that's kind of a normal effect that we're seeing and nothing special really happening there. But it's an intensely competitive business, always has been. But I think that behavior hasn't changed much during the cycle so far.

Okay. And then, just given the moves you've done with your supply chain following 2018 tariffs, the inventory build in the quarter, maybe just a little more color on some of the opportunities to maybe drive market share gains going forward? And then also any color on adjacent market growth? And I'll leave it there. Thank you.

In terms of market share gains, only a few national or global companies have the global buying power we do. So, I think against the smaller competitors, the regional PE-backed competitors, we do have an advantage, and we intend to take advantage of that. And that's primarily due to volume. We buy a lot more from a lot more suppliers, and we have a bigger say at the table in terms of product availability, which of course being the most important thing, seconded by product cost, rebates, return privileges, etc. So, we have an advantage in that regard. In terms of how that plays out during the rest of the year, I'm not sure. But what was your second question, Adam? I want to make sure I got it.

Yeah. Just any additional color on adjacent market growth? Maybe an update on the energy evolution space, industrial, etc.?

On the adjacent markets, we have previously defined them as water, wastewater, the mining industry, and chemical processes, which align well with our U.S. Process Solutions business in fluid movement. We are consistently winning contracts in each of these markets and anticipate steady performance moving forward, even though there may be some fluctuations due to specific projects. Dave highlighted an interesting project the Trojan group secured in agricultural processing with a water and egg producer, marking our first venture in that area, and we believe more opportunities will arise. Our outlook for this is positive. Regarding data centers, there has been significant investment, frequently highlighted in the news. We shared insights on how DNOW can engage in that industrial sector, particularly related to natural gas power generation that supports reliable data centers. We are actively pursuing future projects in that space. Additionally, our MacLean group possesses electrical and lighting capabilities, bolstered by our new acquisition in Singapore, which should enable us to explore further opportunities in the U.S. with our PVF+ offerings. Lastly, in terms of energy evolution, the decarbonization business appears steady as our clients continue to aim for reduced methane emissions, a trend we expect to persist. The carbon capture sector experiences variability, with future projects anticipated but currently smaller and slower in execution for early 2025. Regarding RNG, we've seen more EcoVapor sales in the latter half of the last couple of years compared to the first half. We are eager to expand in adjacent markets and have a positive outlook for future growth there.

All right. Thank you for taking my questions.

Thanks, Adam.

Thank you. Our next question comes from Chuck Minervino from Susquehanna. Please go ahead.

Hi, good morning.

Hi, Chuck.

Good morning, Chuck.

Hey. So, I was just wondering, maybe you can give us your updated thoughts on the geographic kind of growth for the year. You reaffirmed the full year revenue growth, I guess, flat to up high-single-digits, but just kind of your updated thoughts here on U.S. versus Canada versus international, how they should shape up for the year?

Okay. So, international, I think we talked last year about year-over-year, pretty flat. We made some restructuring moves in international last year, and the idea there was to take out some risk. Add some focus for our management team to focus on where we're strong, which is in the U.K. and Australia and parts of the Middle East and Asia Pacific area, and to unfocus on the things where we get paid late and we have too much inventory and we're not making the returns that we expect. So, we want international focused on profits and cash flow versus volume. So, we expect year-over-year general flatness with international. Canada, it's a highly competitive business. We expect the second quarter to decline, of course, going into breakup, a strengthened 3Q, and then some seasonal moderation, maybe a decline going into the fourth quarter. But I think where we're really going to see the most action is in the U.S. We talked on our last call about where we're going to see growth in midstream, and midstream is actually tracking better than we expected. So, we're excited about the growth there. We're going to see a benefit from tariffs in the United States. We won't see that benefit elsewhere. And that should boost revenues. And we think we have an advantage against most of our competition there because of our size and the volumes we produce. Trojan, a new acquisition, is tracking better than expected, and that's going to be a boost to the U.S. business. Our April bookings were really strong, and April tends to be the shortest revenue month of the quarter. So, we're optimistic about making our plan in the second quarter and that parlaying into later in the year. And we are poised to do more M&A. It's a matter of the parties coming to the right price and terms, et cetera. And we think most of that M&A is going to happen in the U.S. and most likely in the Process Solutions Group, which is becoming a bigger and more important part of our U.S. business. So, a lot of optimism in the U.S., but general flatness elsewhere around the world.

Got you. And I just thought maybe you can give us a little bit more detail on this new acquisition you're doing, this Natron International. I don't know if you can help us with kind of the revenues that that brings in. It sounds like it's a small one, but just kind of how you're thinking about that and how it's going to contribute?

Yeah, it's small. Revenues are going to be in the 12% to 15% range. The multiples are in our standard 4% to 6% range, probably closer to the 4%. But in terms of particulars about the business, Brad, do you want to give some color on it?

Sure. They are based in Singapore and closely aligned with our MacLean Electrical Distribution business, now known as MacLean International, which operates from the U.K. and Australia. We are particularly excited about expanding into Singapore and the Southeast Asia and Asia Pacific markets. They provide products such as lighting, cable glands, and electrical bulk materials. Additionally, they serve a wide range of markets including offshore, marine, petrochemical, pharmaceuticals, shipyards, FPSOs, and data centers. We appreciate the diversified markets they cover and are eager to integrate them into our operations and explore potential revenue synergies with our MacLean leadership team.

Got it. And just one last one for me. I think you mentioned a $15 million kind of one-time revenue in the quarter or something that's going to not continue. That sounded big to me. I don't know, are your projects normally that large? I was just wondering if you could give us a little bit more color on, or if there's other opportunities like that one out there in the future.

That particular was multiple projects in the Kazakhstan area, which happens to be one of the countries we're pulling out of. Those were pent-up projects, but overall, the business wasn't strong. These projects ended up being at the tail end of our residence there. But we do have the occasional $10 million, $15 million project. We used to have more of them internationally. We see a lot less of that today internationally, but they do occur from time to time. And international, as you probably recall, Chuck, has been lumpy in terms of quarterly revenues in part due to the timing of projects. But that won't recur. We'll see some growth outside of that, outside of Kazakhstan, and our core MacLean business offsetting some of that $15 million decline. But that's kind of the read on that project and how they occur in size, et cetera.

Got it. Thank you.

You're welcome. Thank you.

Thank you. Our next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Thank you. Good morning. David, a lot of the E&P companies are talking about possibly curtailing drilling and completion activity given the macro environment. Can you talk about how DNOW's recent efforts to diversify the revenue stack away from just D&C insulates you partially from a potential slowdown in that area?

Our focus is on growing with the engineering and construction customers to gain market share, and we believe our position allows us to achieve that, as evidenced by our progress in recent quarters. Additionally, we are dedicated to expanding our energy transition business, referred to as energy evolution, which is a five-year strategy aimed at capitalizing on new energy sources. We have made significant progress in this area and anticipate continued success. Many of the current deals we are exploring provide adjacency benefits that will help us enhance our pump business overall, specifically our water and wastewater business, along with other mining and end markets outside of traditional oil and gas. Most notably, we are experiencing substantial growth in the midstream sector, which helps offset some of the declines in upstream that we discussed last quarter and are still facing now. We have adjusted our inventory and sales focus and made our largest acquisition to date, the purchase of Whitco, to strengthen our position in this area. We are transforming into a strong player in midstream, and we expect this growth to help balance out any losses in upstream sectors. Brad, do you have anything to add?

No, I think you captured it.

Dave, you've talked about a couple of produced water projects I think this quarter and maybe last. Is that an opportunity for DNOW to expand its activity with producers or some of the water businesses just on the production side of the equation?

Sure, I'll take that. Since our Flex Flow acquisition a few years ago and the PMF acquisition that followed, we've developed a strong interest in the produced water segment, particularly in areas with a high volume of produced water that needs to be managed—either transferred, recycled, or reinjected. Traditionally, we've sold permanent water transfer and SWD units through our fabricated business. However, we have not engaged in rental services. As customers look to conserve cash and minimize capital expenditures, they are increasingly interested in leasing options. Entering the rental market with Flex Flow and PMF has been well-timed and beneficial for us. Additionally, our Trojan acquisition last year filled a gap in our offerings, combining layflat hoses with portable water transfer pumping units that are highly mobile, alongside an automation package that allows us to provide comprehensive solutions to produced water companies offering turnkey water management services. These companies have become significant clients for us, in addition to traditional operators. As long as completion activities remain strong, we will need to address water management, whether it involves recycling or reinjection. Furthermore, these services can extend into adjacent markets. We have rented some units for downstream refining applications through Flex Flow and Trojan is making inroads into the agricultural processing sector. We appreciate the adaptability of our solutions into these industrial markets, and we aim to refocus our sales team to exploit these industrial opportunities alongside our upstream efforts.

I think you mentioned that Digital Solutions accounted for about 53% of SAP revenue, and that this is a high watermark. Is that correct?

Yes, I believe so. That's a high point for our SAP revenue, which constitutes about 80% of our total revenue. This figure can vary based on customer activity each quarter. In the previous period, we were below 50%, but we were pleased to see that number gradually rise. Over the past eight to 12 quarters, we've observed an upward trend. Our digital transformation and IT teams are diligently working with customers to find solutions that enhance the efficiency of doing business with DNOW. Both our customers and we are experiencing the benefits of this, leading to increased efficiencies and higher productivity levels.

Is that what underlies, Dave, your comment about, in some ways, growing with your customer by being able to offer them more efficient procurement solutions, which lowers the cost of the transaction to them and generates more business opportunity for DNOW?

I think so. And I think it's most important and the timing is great for what's happening generally with price indexing across all imported products.

Thank you.

Thank you, Jeff.

Thank you. Our last question comes from the line of Josh Jayne from Daniel Energy Partners. Please go ahead, sir.

Thanks. Good morning. First question, just when we think about what's going on in the U.S., and it was helpful for you guys to lay out guidance for not only Q2, but for the full year, could you remind us first how much of your U.S. business today is upstream levered? And then, second, embedded in your guidance, what are you expecting from the rig count or completions count in the second half of this year as we've heard some operators come out and start to cut CapEx?

Our U.S. business is likely around 70% in terms of upstream. There is some overlap with midstream, and at times, it can be unclear what belongs to midstream and what belongs to upstream. However, we view the midstream segment as a crucial area for growth. What was the second part of your question?

The second half was just given that you have some positives going on in your business. So, when we think about midstream and then also tariffs positively impacting the business. But I'm just curious what your assumption was and how you're thinking about activity in the back half of the year on the rig count and completion count in the U.S.

Thanks for the reminder. Regarding the rig count, there are various forecasts for potential changes in rigs over the next few quarters. One recent report indicated that rig counts could decrease by 60 to 75 by year-end. If that happens, we might see a 10% decline in rig counts, which could lead to some revenue decreases. While there’s not a direct correlation with our revenues, it's possible that we could experience some declines. However, we've observed support in areas outside of rigs, such as completions and overall production, suggesting that the correlation might be even weaker. Nevertheless, we could still witness some revenue declines. At the same time, we have upcoming tariffs that might entirely counterbalance any rig count-related impacts, which haven't started yet. It's speculative for me to predict what might happen with rigs; we’re facing two competing situations. On one hand, rising costs are leading to higher prices, which could be somewhat mitigated by a drop in rigs. However, we still lack clarity on how significant that decline may be, if it happens. Some customers plan to maintain their production levels, while others intend to slightly reduce their rig counts and budgets. It's still early to call. The primary factor affecting this is the fluctuating oil prices. This is an uncertain metric that may shift. Uncertainty can work both ways, and oil prices could rebound in the next month for various reasons. So, I’m unsure about the potential impact at this time.

Understood. Thanks. And then maybe just one follow-up. You obviously closed the acquisition. And then I believe you highlighted that the M&A market could potentially be active in the U.S. over the course of this year. I'm just curious, maybe you could comment on when you see some volatility like this in the energy market, does that make things more difficult to get across the finish line? Have you seen an increase in opportunities? Maybe just speak to the M&A landscape in a little more detail would be great. Thanks.

Well, in terms of the landscape where we're at right now, we have several active conversations. Varying degrees of interest and seriousness. Sometimes we're a natural operator, and we can come to terms on price, and we can get a deal done in a number of months. And sometimes we're not necessarily the natural operator, but we have similar customers, overlaps with suppliers, and we can make a deal work at the right price. So, those are various levels of conversations happening with companies. I do think people are going to be a little cautious about the timing of completing a sale. We're not necessarily seeing that. But I think this would be a time where there'd be a little bit of caution in terms of timing, primarily from the oil price news, which is really fairly fresh. But otherwise, I think the conversations we're having are active and kind of a normal level of activity there. So, no real tangible evidence of sellers sitting on the sidelines, but I think naturally, there'd be a little caution.

Appreciate you taking my questions. Thanks. I'll turn it back.

Okay. Thanks, Josh.

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

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