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Edited Transcript of DNOW earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 NOW Inc Earnings Call

Houston Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of NOW Inc earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Cherechinsky

NOW Inc. - Senior VP & CFO

* Richard J. Alario

NOW Inc. - Interim CEO & Director

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Conference Call Participants

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* Adam Michael Farley

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Blake Anthony Hirschman

Stephens Inc., Research Division - Research Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Vaibhav D. Vaishnav

Scotia Howard Weil, Research Division - Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Welcome to our third quarter earnings conference call. My name is Sylvia, and I'll be your operator for today's call. (Operator Instructions)

I will now turn the call over to Senior Vice President, Chief Financial Officer, Dave Cherechinsky. Mr. Cherechinsky, you may begin.

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [2]

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Thank you. And welcome to the Now Inc. Third Quarter 2019 Earnings Conference Call. We appreciate you joining us this morning and thank you for your interest in NOW Inc. With me today is Dick Alario, Interim Chief Executive Officer. NOW Inc. operates primarily under the DistributionNOW and Wilson Export brands and you'll hear us refer to DistributionNOW and DNOW, which is our New York Stock Exchange ticker symbol during our conversation this morning.

Before we begin this discussion on financial results for the third quarter of 2019, please note that some of the statements we make during this call, including the answers to your questions may contain forecasts, projections and estimates, including but not limited to comments about our outlook for the Company's business. These are forward-looking statements within the meaning of the U.S. Federal Securities Laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the year. We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest Forms 10-K and 10-Q that NOW Inc. has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental, financial and operating information may be found within our earnings release on our website at ir.distributionnow.com or in our filings with the SEC.

In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP, you'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs; sometimes referred to as EBITDA; net income, excluding other costs; and diluted EPS, excluding other costs. Each excludes the impact of certain other costs, and therefore, has not been calculated in accordance with GAAP. A reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the quarter. A replay of today's call will be available on the site for the next 30 days. We plan to file our third quarter 2019 Form 10-Q today, and it will also be available on our website.

Now please let me introduce and welcome to the call, our recently appointed Interim CEO, Dick Alario.

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Richard J. Alario, NOW Inc. - Interim CEO & Director [3]

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Thank you, Dave, and good morning, everyone, and welcome. I want to kick off this morning letting everyone know that especially with regard to serving our customers and executing on our strategy, it's business as usual at DNOW. Our proven and long-serving executive team is very clear about DNOW's vision for the future and our Board is fully supportive of our current strategy. Because of its enviable balance sheet, a very strong customer base, our global reach and especially because of our hard working employees, managers and executives, the Company is well positioned to continue to improve its market position.

I'm grateful for the opportunity and the responsibility that the Board has entrusted to me in this interim capacity and I'm very excited to join DNOW's outstanding team. As I get up to speed in my new role, I look forward to meeting and working with our dedicated employees and other stakeholders. And let me emphasize, DNOW is fortunate to have this proven and long-serving leadership team and employee base already in place and I'm ready to work beside them. Giving my brief time in my new capacity, I'll defer to Dave this morning to dive into the details of the third quarter results, but I would like to touch on our strategy and then highlight a few key themes.

First, I'd like to talk to you about some reasons, the team here perhaps has a more positive outlook than others as we faced the current market. In any market especially when uncertainty is pronounced it's paramount to focus on what you can control and NOW is no different. DNOW's promise and focus has been and will continue to be delivering superior customer service, financial discipline and exercising sound judgment to deliver results without sacrifice of our core principles or values.

Now for a few key themes, free cash flow generation in the quarter was $97 million, enabling the Company to return to a 0 debt position for the first time since 2015. This important milestone is a testament to the continued working capital discipline by the leadership team and our employees across the globe. This strong performance was further exemplified by improved collections and inventory turns across all 3 business segments in the period, driving our working capital as a percent of revenue down to 19% for the quarter, thus beating our 20% target.

Moving to growth. Our capital allocation cadence typically follows the ebbs and flows of the overall market, and it will continue to do so. Our appetite in a slowing or contracting market lends itself to acquisitions, while our tenancy shifts to organic opportunities during market expansion. Now that we've reduced our debt to 0 and continue to exercise financial discipline, our total liquidity exceeds $600 million, providing ample ability to deploy capital and seize market opportunities. We're focused on M&A and we expect the pipeline to grow.

Our strategy remains to further differentiate DNOW and generate accretive returns to the Company and its stakeholders. As an example, during 2015 and 2016, we acquired Odessa Pumps and Power Service moves that immediately expanded our product offering and our value to customers while ultimately establishing our U.S. Process Solutions business. Last quarter, we added 2 more businesses to bolster the momentum in U.S. Process Solutions. These businesses continue to capture market share and differentiate DNOW in the marketplace.

In Canada, revenue was up 12% sequentially due to increased market activity as it exited spring breakup. We continue to outperform in Canada and win business in a depressed market. We're scaling our organization to match market conditions by consolidating our branch footprint to reduce operating costs, while maintaining our ability to provide superior customer service. And we remain excited about the long-term prospects in the international arena and we want to congratulate our international employees, in particular MacLean Electrical for driving international revenue to its highest level since the second quarter of 2018.

So before moving on to discuss the outlook for remainder of 2019.

I will turn the call back over to Dave, so he can review the quarter financials.

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [4]

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Thanks, Dick. For the third quarter of 2019, we generated $751 million in revenue, down $71 million or 9% compared to the same period in 2018. Sequentially, revenue declined $25 million or 3%. The U.S. represents approximately 3 quarters of our revenue and in the U.S. rigs declined 7% sequentially, while our revenues fared better than that declining 6%. And when compared to the same quarter in 2018 U.S. rigs declined 12% with our revenues dropping less by 10% year-over-year.

Sequential and year-over-year growth in Power Service, part of U.S. Process Solutions limited the revenue decline. It is worth noting that U.S. rigs declined 12 of 13 weeks in the third quarter. Now with 124 fewer active rigs since our last earnings call and 260 fewer rigs since year-end 2018. U.S. revenues were $567 million, where U.S. energy centers contributed 51%. U.S. supply chain services, 29% and U.S. Process Solutions 20% of third quarter 2019 revenue.

We have successfully completed the integrations of 2 second quarter U.S. Process Solutions acquisitions and customer interest in our recently acquired Houston area fabrication business continues to grow. As an example, during the quarter we booked an order from a top customer for 30 test separators destined for the Eagle Ford. This additional fabrication capacity allows for shorter lead time deliveries, which are more attractive to our customers with the work done closer to the action. In the quarter, we want a new multi-year midstream customer contract in the Permian, estimated to be $20 million to $30 million a year. We will be providing solutions as well as all the midstream products like high yield fittings valves and line pipe. This new customer will have numerous midstream projects that will be continuing throughout 2020 as they will be very active in the Northern Delaware Basin, as they complete multiple processing plants. U.S. energy centers revenue was down 8% sequentially, primarily due to steel line pipe project sales which softened in the quarter due to project cycles in a market oversupplied with pipe. Replacement cost per welded and seamless pipe continue to drop putting continued pressure on pipe pricing.

Turning to U.S. Supply Chain Services. Revenue was down 4% sequentially as E&P customers continue to focus on capital discipline to generate free cash flow, resulting in lower purchases to DNOW. U.S. Process Solutions revenue was down 4% sequentially as expected, coming off a record 2Q revenue quarter. Activity for our pump packages, fabricated process and production equipment was led by the Permian, Bakken, Rockies and Eagle Ford for orders on vessels, LACT units, pumps and midstream gas and measurement units. We delivered a large pipeline booster pump package for midstream customer for a crude oil pipeline in the quarter. Odessa Pumps is expanding our field service technician program to expand our customer capabilities to Service Pump equipment after the sale, as customers reduce capital budgets, they are more likely to repair existing equipment which replace it, more technicians mean shorter customer wait times and the opportunity for increased product sales and repair work.

Power Service growth year-over-year in the quarter was driven by large LACT packages delivered in the Permian, Bakken, and Powder River Basin for major midstream-gathering customers as well as E&Ps. Our added vessel capacity in the Houston area also helped us gain additional quick turnaround ASME package deliveries in the Eagle Ford and Bakken.

Revenue gains from our piping specialties acquisition yielded additional growth in the Southwest Wyoming soda ash mines and power plants. Canada, revenues were $83 million down $10 million or 11% year-over-year against a 37% decline in rig count. We continue to outperform in a depressed Canadian market. Revenue was up 12% sequentially due to increased activity as we exited spring break-up. Our Canadian team continues to win business in a down market with activity in the Cardium and Viking plays. Government post-production women's are driving lower oil and gas investment and tightening access to credit for customers. Takeaway capacity constraints are leading to high levels of inventory resulting in production curtailments by the Alberta Government.

This environment continues to impact DNOW's Canadian business growth opportunities, we are concentrated on improving our position. And the team there is winning as you can see by the 3Q revenue result. Due to reduced activity levels in the Canadian market, we are scaling our organization by consolidating and reducing our branch footprint, (inaudible). International revenues were $101 million in the third quarter of 2019, up $2 million from a year ago, net of a $3 million impact from unfavorable foreign exchange rates. Our International segment revenue was up 4% sequentially on increased project is activity.

In Latin America, we capitalized on an increase in join activity in Mexico and Brazil, resulting an MRO equipment sales. We are also seeing an uptick in OEM and MRO product sales exported to West Africa. We experienced some softness in the Asian market and flatness in the Middle Eastern market sequentially with the slowdown in rig load-outs and credit tightening across the international region. We are evaluating international activity to bolster resources or pull out costs as needed.

In the third quarter, gross margins were 20.0%, a 30 basis improvement sequentially, due primarily to product and geography mix. Pipe sales which are trading at lower margins today declined as a percent of sales. In Canada, which is trading at better than average product margins grew as a percent of sales. These mix effects enable to welcome overall gain in gross margins. Gross margins were 19.9% year-to-date September 2019 and 20.0% year-to-date September 2018. We're pleased with the results of the strategies that emphasized higher margin product lines and employed technology to maximize order win rates and product margins enabling the kind of year-to-date price stability we see in this year, amid and otherwise deflationary environment.

We expect gross margins to be choppy in the near term as the market reacts to reduced activity levels, oil and gas commodity prices and more directly to observe steel price declines. Warehousing, selling and administrative expenses or WSA was $136 million or flat sequentially and down $6 million from the third quarter of 2018 as we made expense adjustments in the period to reflect market trends. WSA is down $15 million year-to-date September 2019 versus year-to-date September 2018. We continue to focus on efficiencies and have reduced headcount by about 75 in the third quarter, an additional 75 reductions in October or a 150 reduction since the end of the second quarter.

When considering the locations closed or consolidated in 2018 and through the third quarter of 2019, the revenue generated in those locations approximated $4 million more in 3Q '18 then in 3Q '19 or $26 million more on a year-to-date basis. While we did we retained some of the revenue by supporting customers from other locations we were able to move resources elsewhere and improve earnings and returns on working capital. This remains key at DNOW, grow the business while demand and improved productivity and working capital velocity. This is the tactical side of our scaling the business to meet market demand. In the fourth quarter, we expect WSA to be in the mid to low $130 million range.

Operating profit was $40 million or 1.9% of revenue, net income for the third quarter was $10 million or $0.09 per diluted share. On a non-GAAP basis, EBITDA excluding other costs was $24 million or 3.2% of revenue for the third quarter of 2019. Net income excluding other costs was $9 million or $0.08 per diluted share. Other costs, after-tax for the quarter included the benefit of approximately $2 million from changes in the valuation allowance recorded against the Company's deferred tax assets offset by approximately $1 million in other costs after-tax in the period for severance. Our effective tax rate for the 3 months ended September 30 2019 as calculated for U.S. GAAP purposes was 15.2%.

Moving on to operating profit. The U.S. generated operating profit of $9 million or 1.6% of revenue, a decline of $12 million when compared to the corresponding period of 2018, primarily due to a decline in revenue, partially offset by reduced operating expenses. Canada operating profit was $4 million or down $1 million when compared to the corresponding period of 2018 as a result of the revenue decline mentioned earlier. International operating profit was $1 million or up $1 million when compared to 3Q '18 due to the increase in revenue, coupled with a decline in operating expenses.

Turning to the balance sheet. Cash totaled $113 million at the end of the third quarter, with $76 million located outside the U.S. during the third quarter of 2019. We repatriated $5 million from our Canadian operations in the period. We exited the quarter with no outstanding borrowings again -- under our revolving credit facility, achieving a 0 debt position.

At September 30 2019, our total liquidity from our credit facility availability plus cash on hand was $620 million. Working capital, excluding cash as a percent of revenue from the third quarter of 2019 was 19%, under 20% for the first time since spin-off. Accounts receivable were at $466 million at the end of the third quarter, down 30 million sequentially improving DSO to 57 days.

Third quarter inventory levels were $548 million resulting in improved inventory turn rates to 4.4x . And accounts payable over $326 million at the end of the third quarter with days payable outstanding at 49 days. Net cash provided by operating activities was $101 million in the third quarter with capital expenditures of approximately $4 million in the third quarter and $7 million year-to-date, resulting in $97 million in free cash flow in the quarter and $212 million in free cash flow for the trailing 12 months.

I'd like to close with the summary of where we stand through 3 quarters. In our February guidance, we said that we expect in 2019 revenues to be flat to a decline in the low single digits year-over-year and through 9 months, 2019 revenue is within that range. We said free cash flow would be similar to 2018, maybe better and free cash flow is actually more than doubled the 2018 3Q year-to-date level at $143 million or $212 million on a trailing 12-month basis through September. We said we'd be strengthening our market position and we did that markedly in Canada and the U.S. Process Solutions. We said we would work towards our goal of 20% working capital, excluding cash as a percent of revenue and we achieved 19% in the quarter. We said we would maintain price discipline and then we'd have to defy gravity and price if the market were to slow down to maintain gross margins. And it has and we did, after 9 months in 2019 year-to-date gross margins were 19.9% in a deflationary period just barely below the 9 months 2018 level of 20.0% in an inflationary period. We said we'd expect quarterly WSA to be in the low 140s, high 130s yet we are in the mid-130s and making adjustments towards the low 130s. We said 2019 EBITDA could mirror 2018 levels and EBITDA is at $82 million through 3Q '19 eclipsing the $78 million through 3Q '18. So we're pleased with where we are after 9 months, have been produced solid earnings, the best working capital velocity, no debt and bright inorganic prospects.

With that, I'll turn the call back to Dick.

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Richard J. Alario, NOW Inc. - Interim CEO & Director [5]

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Thanks, Dave. Looking ahead, we expect seasonal and rig count declines, customer budget exhaustion and CapEx discipline to continue to impact the top line of our business during the remainder of the year. Through the first 9 months of the year, our revenues declined $51 million or 2% compared to the same period in 2018. Within the range we guided to back in February. Given persistent North American active rig declines, we expect the fourth quarter to be down seasonally from the third quarter normally a 5% to 10% decline and now expect that it will be at least at the high end of that range.

Before I move on to recognize, one of our dedicated employees, I'd like to emphasize some of the progress the team here at DNOW made in the execution of our strategy in the third quarter. We continue to optimize our footprint with facility consolidations focus on margin discipline in a challenging U.S. land market and invest in technology to increase our (inaudible). We're leveraging our distribution centers and optimizing our logistics, which is resulting in reduced inventory and better turns. Our sourcing strategy is structured to respond to changes in import tariffs, reducing working capital as a percent of revenue and leveraging our acquisitions through cross-selling opportunities. The success of these, as evidenced by generating $97 million of free cash flow in the quarter. And so it's easy to see that the outstanding leadership team and employees at DNOW had made excellent progress on our strategic objectives. Our healthy balance sheet provides the wherewithal for inorganic growth options, such as the 2 small acquisitions that we closed last quarter.

And now it's my pleasure to continue denounce tradition and recognize one of the employees' daily hard work and dedication enabled us to deliver on our promises. 44 years ago in August of 1975, in Shreveport, Louisiana, a young man accepted a position as a warehouse man and truck driver working for Wilson's supply. 6 months later Murphy Grier was promoted to inside sales and in 1979, he moved to Brian Texas to be the operations manager for the Brian Branch. Over the years, Murphy's held several roles including branch manager, operations manager and warehouse manager. And the team here tells me that whenever a branch got behind on invoicing or needed some sort of expert help, Murphy was the guy that ran toward the fire.

Some of Murphy's support staffs included Evanston, Wyoming, Tuscaloosa, Alabama and Delhi, Texas, but he always returned to Bryan, Texas. Murphy's an early riser often in the office, around 3:00 AM. In 1998, Murphy received an employee recognition for countless hours of dedication and continuous support to meet our customers' requirements. Murphy and his wife Lynne enjoy spending time with their 8 grandchildren. And Murphy, I'm very proud and on my first earnings call here at DNOW, I can thank you for your continued dedication and service to our company. And we have one last thing Murphy, especially this week Go Tigers.

I'll turn the call back to Sylvia now for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Walter Liptak from Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [2]

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I want to -- I wanted to ask about some of the numbers with cash flow and the cash flow is really strong this quarter. And I wonder what the fourth quarter is going to look like typically, accounts payable, those come down in the fourth quarter, and with your DSOs? It looks like there could be more room on DSOs. Where do you think you can get those?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [3]

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Okay. In terms of -- we're going into the fourth quarter and we talked about the seasonality effect and the expected decline in revenue. So we think we'll continue to reduce inventory meaningfully, our teams have done an excellent job at that all year long. We had the highest churn rates in the third quarter, we've had since we've spun and we've made very nice progress there in terms of accounts receivable. I think the way that the quarter will go start the quarter off with October being the highest and revenues and things slowing down as you'd expect throughout the season. In the meantime rig count are declining, so things will really slowed down towards the second half, so collections will be better in the fourth quarter than usual given the timing of revenues. Accounts payable will maintain most probably at the same number of days we usually do. So we expect a strong cash generation quarter given the decline in revenues and the focus our whole organization has on managing the balance sheet.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [4]

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Okay. It sounds good. And I think one of the things that we're learning about is the cost control and the discipline that you guys have had and I wondered if we could talk a little bit more about the WSA and your comment of getting below the $130 million level because you've been working hard on cost discipline for a number of years now, how much more costs can come out in 2020? And what kind of costs are coming or last like it is a more facility costs and as you optimize logistics, what do you think is a target run rate for that?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [5]

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Okay. Yes, you're right. We've been focused on being more efficient as we approach the market. And while we were growing during the, if you can call them the years of 2017 and 2018 we grew and really became a lot more productive. Now we're in a different scenario where really all year along the U.S. market has a shrunk. So we've been pulling out costs. And in the last call, we said we'd have a $138 million WSA in the third quarter, it was $136 million because we've begun to make cost adjustments and those include facility closures, reduced rent and lease costs resulting from that on personnel reductions, I mean, we've been doing those globally. And then kind of more stridently giving the North American activity direction. So that's where you're going to see most of the cost savings are in personnel rent and the peripheral cost to come with that. That's a big focus for us, so that's -- we're not really ready to talk about what's the level is going to be for 2020, we'll be more laboratory about that on the February call.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [6]

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Okay. All right, fair enough. If I could ask one and just a give a look at into customer budgets for 2020. Where do you think the -- what's your outlook for rigs or customers, so tell me about spending for next year?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [7]

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I think the early reads are 2020, it's going to see some contraction -- some further contraction. There are some prelim numbers being put out there. I don't think the budget's terms are being -- are formalized and certainly not to a position where we're ready to comment and what our outlook looks like, but it looks like in North America anyway, the market will shrink, then it could be -- so I don't want to really say much more than that, but that's kind of how we're viewing things. So we've got to position our business to shine in 2020 like we had in 2019.

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Operator [8]

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Our following question comes from Blake Hirschman from Stephens Inc.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Analyst [9]

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On the force you commentary, I was curious if you could give a little bit more by way of geographic trends in that kind of at the upper end of sequential historical declines kind of that 10% or so, how does that break out by different geographic market?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [10]

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Okay. I'll start with international because that's one area where there is ultimately some optimism there. And so we expect for the fourth quarter, at least our international business to be flat with some projects revenue moving up or down to which might make it down a few million or up a few million, but flattish internationally. In Canada where as you know, historically, the fourth quarter used to be better than third, that has not been the case for the last couple of years. So we do expect revenues to slow down there.

I don't have a good feel for it in Canada, but we do expect a decline in revenues overall. In the U.S., if you look at last year for DNOW we had a stellar 3Q '18, we had $822 million in revenues, just a perfect storm of great revenue news in that period and then things really slowdown in U.S. and I think our revenues overall went down 7%, and that was throughout 4Q '18 rig counts were going up throughout the quarter and peaked at December 2018. The opposite is true here. So we're going into the fourth quarter with rig counts probably going to drop at least 10% from the third quarter level and the sentiment is sour, customer budgets are exhausted and people are waiting until the 2020 budget to refresh. So we talked about where we normally see a 5% to 10% decline. We think it will be at the high end of that range or possibly higher, so that's kind of the flavor. The USP in 75% of our revenues that's the one I think we have the most color on how the revenues are going to trend.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Analyst [11]

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Got it. And then on the gross margins. Nice sequential pick up there, you called out mix, it sounded like is probably the key driver. I think the slides also to talk about better pricing, could you kind of frame-up the drivers behind that sequential gain?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [12]

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So interestingly we saw pretty stable margins across most product lines except time. I mean some product lines, we actually saw some product margin gains. So you could argue, we're seeing price stability where the market is right now, except for pipe. What impacted our second quarter to third quarter gains in gross margins was we simply sold less pipe in the third quarter. So as a percent of sales, what is a lower margin product was reduced in the third quarter. And in Canada, right now we have better than average margins on a segment level and Canada revenues increased and U.S. revenues declined. So that all -- kind of a geographic and product mix, which drove overall improvement in gross margins. But otherwise, we're seeing some margin stability, except for steel related products.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Analyst [13]

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Got it. And then just lastly on -- Dave it looks like you paid down all of it, how should we be thinking about that you guys want to stay debt free and into the 4Q and maybe into the next year or you just going to tack on a little mainly for M&A opportunities come?

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Richard J. Alario, NOW Inc. - Interim CEO & Director [14]

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Blake, it's Dick. Look as you heard it's an enviable to be in our position with the state of the oilfield service business as it is today. So we're going to continue to exercise discipline. But I mean this is prime time or the sweet spot, what we see coming for the DNOW strategy, we have been acquisitive, the acquisitions have been accretive, everybody here is focused on what we can do with the balance sheet. But I think the great thing here is that we are able and have demonstrated, this management team has, they are able to use the balance sheet as its bank account and then quickly pay it back and get ready for the next round. So I think the message here is we stay the course we continue to do what we've done successfully, and we just wait for this pipeline to build some more and take advantage of our strengths.

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Operator [15]

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Following question comes from Vebs Vaishnav from Howard Weil.

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [16]

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Vebs, are you out there?

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [17]

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Can you hear me now?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [18]

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Yes. Yes, we can.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [19]

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Sorry about that. I guess just want to add this elephant in the room, want to speak about if you can provide some color around the recent management changes? That would be helpful.

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Richard J. Alario, NOW Inc. - Interim CEO & Director [20]

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Yes, Vebs, it's Dick. Look, let me start here. After very careful consideration, the DNOW Board determined that a change at the CEO position was best for the Company. And if you go back and look at our press release and the Form 8-K that we filed, I want to emphasize the more terminated Robert's employment without cause. There is no change in our strategy and his resignation from the Board was not due to a disagreement. Look, it often in the case of business, there are times when the Board determines that is necessary to make a change in leadership, when there is a -- when there is not a forecast termination. Let me be clear, when there is not a forecast termination event and there is no financial irregularities of business disagreements which is the case here.

So look, I would wrap it up by saying, the Board now recognize as ample runway for DNOW to advance its market position and generate incremental value. And that -- I've given you something incremental there. So I hope that we can put that matter to bed and move on.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [21]

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Okay. I guess going back to some of the financial guidance that you guys talked about for fourth quarter, maybe Dave, if you think about -- first of all when you guys talk about 5% to 10% decline and maybe higher end, you are talking about overall revenues not U.S. specifically? I want to make sure of that.

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [22]

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That's right. And really that 5% to 10% is where we tend to land historically and we were saying that -- that's normally a good benchmark but given the decline or the erosion of activity in the fourth quarter and in customer discipline, we haven't seen before discipline and focus on free cash flow, we expected potentially go beyond that range. But that's global, that's not just a U.S. view.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [23]

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Got it. And is it -- if you could provide some color around like, is it more energy center or is it more supply chain that's driving that?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [24]

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That's a good question. So I think it would be more energy center, more E&P related. In that end, supply chain is going to be part of that, so if our top big supply chain customers reduce their spending with some of them have notably then that impacts us directly, similar to how would at branch level. Now where we have some offsets and where we've been making gains recently is in the midstream arena. Most of that project related but a bunch of it's related to increased themed activity in our Power Service business. We talk a lot about Odessa Pumps and Power Service as the unit makes up by process solutions -- U.S. Process Solutions, they've just been making great headway, so they'll -- they might fall at a lesser rate in the fourth quarter than we'll see in supply chain or in the energy centers. But even there we expect some revenue declines in U.S. Process Solutions perhaps with stability in the power service area.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [25]

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Got it. And last question if I may squeeze in. I think you touched upon this, but I have -- it was very -- I was very surprised to see U.S. revenues down and margins up, is it -- and I couldn't really see a whole lot of change in the business mix. Could you just address it one more time for me, please?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [26]

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Yes, I think primarily in the U.S., what happened is we had some U.S., we had lower pipe sales. Most of our pipe sales actually happened in the U.S. and those margins have been declining where they were -- where they peaked in 2018, they've been declined in 2019. But because pipe sales themselves declined absolutely as a percent of U.S. sales and as a percent of global sales that improved U.S. margins in global gross margins. But on a DNOW basis also -- our Canada right now has higher product margins than we experience in the U.S., in part because we do more midstream work down here and we sell more pipe down here and Canada sales went up in the period. So those are the main drivers for the 30 basis points improvement in third quarter.

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Operator [27]

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Our following question comes from Sean Meakim from JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [28]

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So maybe just to touch on the midstream a bit more, you've been highlighting some wins there. At the same time, transmission companies are feeling the pressure from investors to become more capital discipline as you've noted line pipe pricing has been very weak. So a lot of cross currents there, can you maybe just talk a bit about the progress you've made in midstream in the context of what, it seems like a more challenging environment, we're spending enough in that stream?

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [29]

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Yes, well look, generally we're going to see fourth quarter declines across all of those up down in midstream markets. And midstream at particular is going to be a function of demand by our customers. But we recently won new business and if you look at on a year-over-year basis and the progress that we've had with our Power Service business, that's what we're limiting the decline in revenues because we're gaining some market share there. So we expect even midstream to decline in the fourth quarter but at a lesser rate from the other revenue streams. We don't have a great feel for that and customer budgets are still being formulated or exhausted in the fourth quarter. But we have seen resilience in new contracts largely led by our solutions offering in Process Solutions.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [30]

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Got it. Okay. And I'm glad that the elephant in the room has been acknowledged, but I was hoping you take a bit more of a forward outlook on that topic. So as Dick leading the search for the full-time CEO, could you maybe just give us some broad strokes of what you and the Board are looking for in terms of internal versus presumably external candidates? What are the type of characteristics that you think are needed in the next CEO?

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Richard J. Alario, NOW Inc. - Interim CEO & Director [31]

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Well, first of all, we're going to select the candidate under a very broad search program. So we're going to take our time and I think it's fair to say that given the very, very strong culture here, we're not going to be seeking to change agent. I think that we're going to seek someone that can facilitate the success of this existing very, very strong management team and prosecute the strategy that has been a winner for us so far. And then I guess the last thing I would say is we're not going to go fast. We're going to be very patient and select the best candidate that accomplishes those things for the Company.

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Operator [32]

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Our following question comes from Nathan Jones from Stifel.

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Adam Michael Farley, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [33]

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It's Adam Farley on for Nathan. My first question is regarding the Canadian market. Clearly, the macro environment there is weak, but it sounds like you guys are making solid progress and maybe gaining share. So I was wondering if you could provide any color on what that market share gain is coming from.

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [34]

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We talked a little bit about it on the opening comments at the Cardium and Viking plays and kind of the oil sands. So we're picking up revenue stream that the other competitors are kind of walking away from. You've got established presence in Canada, good coverage, although we made closures in the quarter. And we're able to scoop up some of the revenues that others are walking away from. And we talked a lot about our management team in Canada. They're a scrappy customer focused group of folks, and we've been repeatedly able to gain ground up there, while maintaining margins in a really kind of miserable environment. So I think it's kind of related to those areas I talked about, but it's also just the attitude of our people and the scrapping nature of how they do business and real excited about not just the revenues but the earnings of that business as well.

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Adam Michael Farley, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [35]

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Okay. That's helpful. And then just switching over to international, it sounds like there's a couple of bright spots project work. Maybe just from a high level as we move into 2020. How do you look at that business? Are you seeing any increased activity and maybe offshore? Any color there would be helpful.

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David A. Cherechinsky, NOW Inc. - Senior VP & CFO [36]

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Yes, I think we're seeing some positive movement in Latin America, in Mexico and Brazil. We're seeing revenues increase there. We're starting to see some interest in our export group, most notably to West Africa. So things are starting to percolate a little bit, still a project business, still in the early goings of what you probably can't even characterize as a recovery internationally yet, but we see -- we have seen optimism there where we're kind of preparing for other possibilities in North America.

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Operator [37]

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Ladies and gentlemen, we have reached the end of our time for question-and-answer session. I will now turn the call over to Mr. Dick Alario, Interim CEO for closing statements.

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Richard J. Alario, NOW Inc. - Interim CEO & Director [38]

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Okay. Thank you for calling in today and we will see everyone in the next call. Have a good quarter.

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Operator [39]

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