Dnow Inc. (DNOW) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2015 Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Senior Vice President and Chief Financial Officer, Dan Molinaro. You may begin.

Thank you, Paulette, and welcome, everyone, to the NOW Inc. First Quarter 2015 Earnings Conference Call. We appreciate you joining us this morning, and thanks for your interest in NOW Inc. With me this morning is Robert Workman, President and CEO of NOW Inc.; and Dave Cherechinsky, Corporate Controller and Chief Accounting 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, throughout our conversation this morning. Before we begin this discussion on NOW Inc.'s financial results for the first quarter ended March 31, 2015, please note that some of the statements we make during this call may contain forecast, projections and estimates, including, but not limited to, comments about our outlook for the company's business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to our 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 regarding these as well as supplemental, financial and operating information may be found within our press release on our website at www.distributionnow.com or in our filings with the SEC. A replay of today's call will be available on the site for the next 30 days. It should also be noted that we plan to file our first quarter 2015 Form 10-Q later today, and it will also be available on our website. Later on this call, I will discuss our financial performance, and we will then answer your questions, but first, let me turn the call over to Robert.

Thanks, Dan. Welcome to DistributionNOW's Q1 2015 Earnings Call. Today, we reported first quarter 2015 revenues of $863 million and EBITDA excluding other cost per acquisition-related expenses and severance of $4 million. With over 80% of our global revenues tied to the provision of pipe, valves and fittings to oil and gas operators, and for maintenance repair and operating goods to drilling contractors and service companies, the reduction in the upstream activity have the expected effect on our business. With sequential rig count declines of 28%, 24% and 4% in the U.S., Canada and international, respectively, it is to the credit of our amazing employees' efforts that our revenues declined at a rate consistent with the global rig count decline and an intensely competitive market, and when our customers were delaying completions of recently drilled wells and cannibalizing their existing inventories to minimize cost. Looking at rig movements on the DNOW weighted geographic basis, our markets effectively contracted 24% sequentially, yet our revenues were down just 19% on an excluding acquisitions basis. For that, I would like to thank our dedicated, hard-working employees for growing market share when customer spending for operating rig was on a decline and for managing expenses to minimize the impact on EBITDA from falling revenue. I'd like to take a moment to acknowledge Eddie Doucette [ph] in our Homer, Louisiana branch, who I've personally worked with on several projects over the last few decades, and who will be recognizing his 49th year at DNOW in just a few short months. Annualized revenue for the quarter, excluding acquisitions, was $1.097 million for average global operating rig, only down slightly from the $1.102 million produced in the prior quarter. With acquisitions, annualized revenue for the quarter was $1.107 million for average global operating rig, sequentially up nearly 6%. Revenue in the quarter from acquisitions was $54 million, up $49 million from the prior quarter. Decremental operating profit flow-throughs on reduced revenues were 24%. This includes $11 million of sales price erosion and $9 million of expenses related to acquisitions and severance. Excluding these items, decremental operating profit flow-throughs were 10%, well within the 15% preprice effect decrementals we were expecting. Digging deeper into the quarter, increased revenue with our downstream, industrial and midstream customers helped partially offset declines with our upstream customers, which are operators, service companies and drilling contractors. Activity declines in the upstream sector were amplified by wells being drilled but not completed, which are estimated to be greater than 4,000 as well as customers destocking their warehouses and drilling rigs being idled. While that trend negatively affected our upstream branches, the reverse will occur when this large segment of our business benefits as customers return to completing wells, building tank batteries and resuming maintenance repair, refurbishment and the restocking of drilling rigs as they go back to work. In the U.S., nice market share gains with our supply chain operator customers in the Eagle Ford and the Permian helped offset reduced volumes with our energy manufacturing customers, the impact of temporary facility closures due to weather, sharp activity declines in the Gulf of Mexico, certain operators shifting facility construction to turnkey fabricators and a challenging line pipe market due to oversupply in some customers remaining in a wait-and-see holding pattern. On a positive note, discussions in proof-of-value pallets are well underway with 3 new supply chain customers that should materialize in the coming quarters and for whom we have little market share today. These 3 customers include an operator in one of the most active shale plays, a large refiner and a manufacturer. I expect to be able to talk more specifically about these customers in the near future. In Canada, where activity declines are most severe and in stark contrast to first quarter normally being the best quarter of the year and in a period where rig count declines in the first quarter time frame were the first, I can recall, outside of the 2009 financial crisis, revenues declined more sharply than rig count due to foreign exchange and in large part to drilled uncompleted wells and delayed or canceled fiberglass line pipe projects in Southern Saskatchewan Bakken. Internationally, revenues were buoyed by 2 March acquisitions, which offset declines from export volumes due to delayed projects, idled or scrap drilling rigs and customers destocking to reduce their OpEx, reduced or canceled valve projects in the CIS and Middle East, a line pipe project in Kuwait from Q4 '14 that did not recur, rig count and well completion declines in Australia, and continued softness in Brazil and Colombia. Looking at market activity moving forward in the U.S., while the rate of rig count decline is less severe now than it was in prior months, for example, the U.S. lost 792 rigs in the first quarter and just 116 in April, many analysts are calling for the bottom to occur in late 2015 or early 2016. Accordingly, an outside of acquisition revenue gains, the market will continue to apply downward pressures on our revenue stream. While we feel strongly that our downstream, industrial and mid-stream customer activity will remain robust or even improve, revenue gains here simply won't be enough to offset declines in the more than approximately 2/3 of our U.S. business tied to oil and gas operators, drilling contractors and service companies. In Canada, where rig counts are already down significantly more than any comparable period since at least before the year 2000, we have now entered the break-up period, where activity drops precipitously due to the ground thawing in several areas and making it virtually impossible to move equipment. The CAODC is forecasting 47% less wells drilled this year in Canada, which will have a direct impact on our revenue stream. We have seen a 25% increase in project quotations as customers take more orders out to bid in an effort to decrease costs. Additionally, for the large amount of goods our Canadian business purchases from the U.S., the effect of a strengthening dollar is putting pressure on margins. While we are experiencing significant declines with customers in the oilsands in Southern Saskatchewan Bakken, the fields focused on gas drilling such as the Duvernay and the Montney aren't experiencing the same level of declines. We are confident in formalizing 2 recent awards. One is for pipe, fittings and flanges for a large international oil company, and the second one is for valve actuation and controls for large independent, both in Canada. They're also receiving considerable off-contract spend or what we call leakage from 3 of the largest operators in Canada, where we don't currently hold the contracts. Internationally, we expect revenue declines from continued activity reductions to be more than offset by a modest seasonal uptick in Russia and Kazakhstan, a few new multiplex pump package skids as well as several pump rebuilds for 3 large operators in Australia, market share gains in the Middle East and North Africa, and sequential quarter revenue increases from recent acquisitions of approximately $30 million. Moving beyond the top line, our priorities of managing expenses, pulling out cash trapped on the balance sheet and investing to grow the company have not changed since our last call. As you will see on our updated investor presentation, which we will post later today, our gross margin percent dropped 240 basis points driven primarily by $11 million of price erosion and $5 million of inventory step-up amortization charges related to acquisitions. We believe that customer price concessions that we've made in this environment were largely reflected in the quarter, but how our competitors react and given the possible deflationary pressures on inventory costs due to market deterioration will influence results in the coming quarters. On our last earnings call, we stated that we plan to reduce SG&A costs from $69 million in the fourth quarter of 2014 to $62 million by the second quarter of 2015. Excluding acquisitions in the quarter, actual SG&A dropped to $57 million, a $12 million sequential decline, and operating and warehousing costs were reduced by $10 million. Warehousing, selling and administrative expenses, which comprises operating and warehousing costs and SG&A and excludes acquisitions reflects $22 million sequential efficiencies, but when including acquisitions shows a net $16 million decline. We will continue bringing efficiencies to operations while stopping short of sacrificing our future. We will position the business to effectively manage through the cycle and prepare to take advantage of a recovery when customers start restocking their operations, begin completing wells and complete delayed projects related to facilities or as we call hookups. Excluding acquisitions, we reduced headcount in the quarter by just under 500 with an additional force reduction of over 150 in April. Today, we have reduced headcount by over 700 from the peak at the end of Q3 '14, while simultaneously adding more than 450 new employees through 6 acquisitions over the last 2 quarters. Additionally, we have instituted a limited furlough program in Canada and have been repatriating several expats we have working internationally. In 2014 so far, we have also closed or consolidated 15 locations. Moving to the balance sheet, while days of inventory and days of sales outstanding grew, these balance sheet accounts combined dropped $146 million when excluding acquisitions. We believe we have just turned the corner in reducing these accounts and fully expect to reduce them an additional $300 million to $350 million in the current market environment and outside of acquisitions throughout the coming quarters. As we allocate capital, we will maintain sufficient liquidity to support growth and recovery as we know well that this business can consume as much cash in an upturn as it generates in the downturn. The process still has fallen dramatically during the first quarter around 25% driven by surge of imports due to a strong dollar and a requirements reduction from pipe mills. The steel mills are looking to drive up the price by more output reduction, new dumping suits and further cost reduction. Steel mills believe prices are at or near the bottom as a steel price increase was announced last week. Pipe prices have not fallen like steel due to idling at several of the pipe mills. Welded pipe prices have fallen around 10%, but many of the mills still have high-priced steel to work through. The welded pipe trade case against the Korean and Turkish mills is expected to have a preliminary announcement in May, but will not finalize until the fourth quarter. Domestic seamless mills are idling capacity, so there's not much room for price to fall on reduced production. If steel prices stay low and the dollar stays strong, we would expect a further deterioration in pipe pricing as well as other steel related products in the second half of the year. Also, in the quarter, we moved to a net debt position of $13 million. On the capital allocation front, we have completed 7 acquisitions; 3 in Q4 2014, 3 in Q1 of this year, and a small win this week in Europe. The largest of these closed mid-March and is called John MacLean & Sons Electric. It has a long history operating in 4 countries with 11 locations and more than 200 new employees, and will help us expand our electrical distribution business. The brands and geographies that MacLean represents fill strategic holes in our current business, the 2 largest of which are IEC cables and electrical operations in the U.K. and Australia. The second largest of these acquisitions, Machine Tools Supply, which we closed in early Q1, provides the same products and services to manufacturers as DNOW supply chain group does as well to customers in the aerospace and industrial market. MTS, which was founded in 1952, brings many years of operating experience, vendor relationships and product leverage to DNOW. Leveraging the strengths, proven processes and experienced staff from MTS, we will now be able to expedite the implementation of several customer sites DNOW has in its order book. The remaining 5 acquisitions represent product line and/or geographic targets for upstream and downstream energy businesses. They fill holes we have for in the valves and actuation in the U.S. Rockies, mid-stream and industrial pipe, valves and fittings and artificial lift in the Mid-Continent, protective personal equipment in Europe, and marine and shipboard cables in the North Sea. These acquisitions added $54 million of revenue in Q1 '15 and should add an additional $30 million quarterly with mid to high single-digits EBITDA moving forward in this current market environment. We currently have 4 mutually executed LOIs in the pipeline for companies and key product lines that we have described in our investor presentations and while on the road. While energy, mining and utilities M&A has slowed down due to weather of the oil prices, and analysts are pondering whether or not the price drop will encourage or discourage activity, our M&A pipeline remains healthy as ever to the point that we continue to increase our deal value threshold. The deal team continues to let the cream rise to the top and is focusing on doing the right deals for our business. While multiples will likely exceed to 4 to 6 range, we had originally targeted for some opportunities based on forward EBITDA projections and a declining market, they are well short of what we offered or what have allocated just a few short months ago. We remain optimistic that we can put our cash and available credit to work to generate returns for our shareholders in a market that is conducive for consolidation. I want to thank our shareholders for their support and for your interest in DistributionNOW. Having said that, I would like to turn the call over to Dan to review the financials.

Thanks, Robert. We're nearing the completion of 1 year since spinning off from NOV. And while our financial results are not where we want them to be, we have accomplished much, including integrating 3 large distribution businesses in North America, converting our company to essentially one worldwide ERP system and creating an independent publicly-traded company, a company which is a world-class provider of products and services to the energy industry. We are facing headwinds from this uncertain market, but this is nothing new, although this downturn is more severe than most others. And our seasoned management team has proven resilient in similar past downturns. We will continue to concentrate on the needs of our customers, while focusing on producing results for our stakeholder. Before I jump into our financials, I would like to join Robert in thanking our dedicated hard-working employees who continue to be a true asset to DistributionNOW. Robert discussed our business, and I will touch on our financials. NOW Inc. reported a net loss of $10 million or $0.09 per fully diluted share for the first quarter of 2015 on $863 million in revenue. This compares with net income of $16 million or $0.14 per fully diluted share on $1 billion of revenue for the fourth quarter of 2014 and compares with net income of $41 million or $0.38 per fully diluted share on revenue of $1.07 billion for the first quarter of 2014. It should be noted that an earnings comparison with the year-ago quarter is not meaningful as Q1 '14 did not reflect the full cost of running an independent publicly traded company. Our first quarter results included $9 million of acquisition and severance-related charges. So when excluded, our net loss was $3 million or $0.02 per fully diluted share. Gross margin was down $50 million in Q4 at 18.0% in the first quarter of 2015 compared with 20.4% in the fourth quarter of 2014 and 19.3% in the year-ago quarter. Half of this margin decline was attributable to reduced volume with a balance due to price reductions, increased cost of products and step-up amortizations for the acquisition assets. Operating margins were down $34 million sequentially as the previously mentioned $15 million gross margin decline was partially offset by operating expense reductions totaling $16 million, which is net of the acquisition-related addition. EBITDA for the first quarter of 2015 was a loss of $5 million. But when the acquisition and severance-related charges are excluded, EBITDA for Q1 was a positive $4 million. Looking at operating results for our 3 geographic segments. Revenue in the United States was $601 million in the quarter ended March 31, 2015, down 11% sequentially and down 15% from the year ago quarter. The first quarter decrease was driven by the sharp decline in the U.S. rig count, slightly offset by incremental revenue gains from acquisitions. Excluding acquisitions, sequential U.S. revenues were down 14% compared with the U.S. rig count decline of 28%. Operating profit in the U.S. for the first quarter 2015 was a loss of $12 million compared with a profit of $30 million for the year ago quarter, reflecting revenue declines coupled with the higher incremental cost of operating as an independent publicly traded company. In Canada, first quarter revenue decreased 36% sequentially to $116 million and down 39% from Q1 2014, reflecting the sharp declines in the Canadian rig count and reduced spending in most regions. Also, fiberglass purchases plummeted as these high-dollar projects were the first to be cut. The nearly 9% decline of the Canadian dollar relative to the U.S. dollar adversely impacted revenue in Q1. Canadian operating profits for the 3 months ended March 31, 2015, was 2.6% compared with 8.4% for the year ago quarter. The decrease in OP was essentially due to the revenue decline, partially offset by the benefits of cost reduction measures in Canada. International revenue was $146 million in the first quarter, down 1% sequentially and down 20% from the first quarter of last year. The revenue decline was primarily due to the nonrepeating of large projects, offset by incremental gains from acquisitions in the period. International operating profit for the first quarter 2015 was 0.7% compared with 6.1% in Q4 2014 as inventory step-up, stamp duty in the U.K. and other costs relative to acquisitions impacted first quarter international results. We continue to be optimistic about our international opportunity. Revenue channels for the first quarter show 75% through our energy branches or stores as many of us know them with declines across the board geographically; and 25% through our supply chain locations, which reflects the continued improvement in the supply chain group, which also benefited by our acquisition activity. Looking at our income statement. I wanted to mention a reporting change with the first quarter statement. We are combining operating and warehousing costs with selling, general and administrative expenses, and we'll begin reporting as warehousing, selling and administrative expenses. We believe this change provides a more meaningful measure of our operating expenses, and including operating and warehousing cost within SG&A is more useful to users of our financial information, plus this will be more consistent with our peers. Operating and warehousing costs were $103 million for the 3 months ended March 31, 2015. This is down $7 million from Q4 2014, and actually down $10 million when acquisition additions are considered. These costs include branch and distribution center expenses. SG&A expense was $16 million in the recently completed quarter compared with $69 million in Q4 2014 and was $44 million for the year ago quarter. The increase over the year-ago quarter is related to the net incremental cost in connection with operating as an independent company, spin activities and ERP conversion and implementation as well as SG&A that came with the 6 acquisitions we completed during the last 2 quarters. When acquisition additions are considered, SG&A actually fell $12 million sequentially. The reductions from Q4 are primarily cost reductions, including contract labor, overtime and outside services. The effective tax rate for the first quarter of 2015 was 19% as the rate was impacted by nondeductible expenses in the U.S. and foreign jurisdictions and other discrete items. We expect the effective tax rate to be close to 30% for the full year. Turning to the balance sheet. NOW Inc. had working capital of $1.38 billion at March 31, 2015. Q1 accounts receivable was $797 million, a reduction of $54 million, which is after adding $64 million from additions, so we showed strong collections progress in Q1, especially in Canada. Inventory was $945 million or $4 million lower than year end, which includes an additional $24 million from acquired companies. We have slowed the inventory replenishment process, and that should show significant reductions in the coming period. Cash totaled $122 million at March 31, 2015, which was down $73 million during the quarter as $183 million was spent for 3 acquisitions mentioned earlier by Robert. Approximately 80% of our cash is located outside the U.S. with some 55% outside of North America. Capital expenditures during Q1 were $3 million. As we've mentioned before, our maintenance CapEx should approximate $10 million to $20 million annually. Our current days sales outstanding were in the mid-80s, and we continue to work on improving these results to closer to the 60-day range. Inventory turns were 3.0x, so we believe we'll return to at least 4 turns. Both of these key metrics were unfavorably impacted by adding ending balance accounts receivable and inventory for Q1 acquired companies with just portions of the quarter being recognized in terms of revenues and cost of products. Days payables outstanding are now running in the mid-50s. On a trailing 12-month basis, our working capital was 35% of sales, 32% when cash is excluded, with our objective of getting to a 25% rate or lower. The single ERP system will be an effective tool to accomplish these improvements thus freeing up additional cash. We ended the first quarter with $135 million of bank debt having finally tapped into our unsecured $750 million revolving credit facility to finance some of our acquisition activity, but our net debt position was only $13 million. Our borrowing cost approximated 1.675%. And when you consider our cash position and the unused portion of our 5-year credit facility, including the accordion provision as well as additional cash coming from our balance sheet, we have plenty of dry powders as we consider growth opportunities for DNOW, certainly, in excess of $1 billion. The second quarter 2015 will be challenging as we deal with this downturn, coupled with a seasonal breakup in Canada as we continue to concentrate on our customer. We have confidence in our strategy and in our employees and in our future as we positioned NOW Inc. to continue to serve the energy and industrial markets with quality products and solutions. We are an organization with an experienced management team, a strong balance sheet and we believe this current downturn creates new opportunities for us and our shareholders. With that, Paulette, let's open it up to questions please.

[Operator Instructions] And our first question comes from David Manthey from Robert W. Baird.

First off, by how long would you expect hookups in the tank battery installation to lead an uptick in the rig count? With all these uncompleted wells, I would think, you'd see activity there before we'd see an uptick in rigs?

Yes, that would be my assumption. I mean, they've already spent the money to drill the wells because in this new environment of these shale plays, the frac process or the completions process, the cost of that is now larger than the actual cost to drill the well, which is the first time I recall that ever being the case. And so our customers are continuing to drill wells and just instead of storing oil in Cushing or somewhere else or store it underground. So as oil prices pick up, I would expect completions will pick up before rig count picks up. When that will happen is hard to say, and it really depends on each shale play because each shale play has a different cost basis. I've read reports all week from different oil companies who've announced earnings, some of them say $60- oil would spur it, some say $65, some say $70. So I don't think there's any really consensus on exactly at what price for energy you would see recovery in the completions process.

Okay. And second, with your organic revenues in the U.S. being down 14% versus the 28% U.S. sequential rig count, could you discuss the factors that drove that outperformance? Again, there might be a timing lag there. There's probably some share gain. I don't know if there's a mix issue. But could you just help us understand what that was like? And is that something that can be sustained?

The answer to your question is yes. I mean, we had share gains with several of our large supply chain customers that we basically manage their entire supply chain, and they've acquired some other firms in areas where we weren't getting the business. And so as we transition -- as they transition supply chain management to us and those fields, we're gaining share even though their rig count is coming down in those markets. And outside of that, there is some mix. We had some shift to business growth in our downstream and in our industrial, in our midstream area, which help offset some of the upstream gains as well -- I mean, upstream declines.

And our next question comes from Sam Darkatsh from Raymond James.

Hey, this is Josh filling in for Sam. Do you think the customer destocking that you talked about is complete? Or is there still more of that to go?

Well, it's hard to say exactly when they'll run out of inventory. I mean, basically, what's happening is for offshore drillers who buy a lot of consumables from us, whether it's safety goods or spare parts or expendables, for all these big offshore rigs that they're idling, they're clearly removing the inventory and redispersing it to operating rigs. And then, on the land market, I know everybody have seen pictures of these different yards and have all these rigs stacked out in them, as they need goods to support their rigs that are still drilling, they're sending their employees in to those yards to look for material as opposed to purchasing it. And then, generally our oil and gas customers, which are a huge piece of our revenue stream, they have their own warehouses where they buy goods from us and our competitors and stocked their warehouses. They're doing just the same thing we're doing. They're cutting back on purchases and trying to eat away inventory before they start buying again. And it shows up clearly in all these earnings announcements that you've seeing from the contractors and from the operators because they're coming in ahead of analyst expectations because largely driven by their OpEx, because their OpExes are coming in much lower than what most folks were forecasting. So when that will end, it's hard to say. Sam, I can't imagine that -- I mean, Josh, I can't imagine that it's going to go beyond this quarter, but it's almost as hard to forecast that as is to forecast what the rig count is going to be.

Could you tell you us what your year-on-year growth was in April?

No. We haven't reported the results for Q2 yet.

Okay. And it sounds like the $9 million of items that you called out was dispersed some between cost of goods and SG&A. Could you quantify those so we can get to an adjusted gross margin?

Yes, this is Dave, Josh. For that $9 million, about $5 million was the amortization of step-up cost for valuing inventory at fair value, $3 million were M&A costs, about $1 million in severance, and that makes -- that's the balance. So $4 million in the warehousing, selling and administrative costs and $5 million in gross margin.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

This is James Picariello filling in for Jeff. So regarding pricing erosion, can you just sort of provide some color on what you're seeing there, maybe by region or product vertical or maybe upstream versus mid-stream? And are you getting any suppliers to cooperate in this price concessionary environment?

Yes. So most of that price erosion is from our upstream segment. And it's with customers where we have healthy gross margins, and we're working with them to try to maintain our share with them. It's not -- we definitely told some customers no when they asked for price concessions because they weren't customers that had margins that would allow for price concessions. So it's mainly with our oil and gas operators and our drilling contractor customers on a global basis that we're having that type of erosion. What we did is we set up, addendum to our contracts with those customers where we basically established at what point whether it's a passive oil or a rig count that we would reinstate oil pricing. So once the market recovers, you should see the gross margins recover with it.

Got it. And then at the beginning of your scripts, you mentioned revenue per rig metrics. I'm just wondering can you go through those numbers again and just talk about how overall demand -- how that metric is relative to your expectations going into it? And what we can expect the rest of the year by region on that basis?

Yes, so we have -- we published a slide after the last call online, that shows, I think, roughly 10 years pro forma performance with Wilson, CE Franklin and Heritage National Oilwell distribution that shows our revenue per rig through the cycles, includes '09 and the ramp up of '08, and everything else. So generally in a market decline, our revenue per average operating rig declines mainly because of the destocking and the drilling but not completing wells kind of scenario. We actually almost duplicated the revenue per operating dig in Q4 -- I mean, in Q1 that we produced in Q4, which did come as a surprise. I fully expected that to drop, and that was mainly due to the market share gains I mentioned earlier in the call. So I would imagine that this -- that numbers got to come down outside of acquisition just generally because customers are spending less per well right now. But who knows? We can have another surprise in Q2, and our operations could excel and produce another number similar to Q1 as far as revenue per rig. Now it grew actually when you add in acquisition. So if we're successful with any of the acquisitions we currently have in discussions, then that actually could go up, but we never plan our business around acquisitions.

Got it. And If I could just slip one more here. $54 million in acquired revenue in the quarter, you said that you expect $30 million in the remainder of the year each quarter. Does that include the acquisition that you closed last week?

It is not included, but the acquisition last week was one of the smallest of the 7. So it really won't move the needle on revenue.

And our next question comes from Walter Liptak from Global Hunter.

I want to ask about the cadence of some of the cost actions that you're taking. In this environment, it looks like with the price oil moving up and completions, the discussion we had that could be short lived. How are you managing cost? Is it to a decremental margin? Or is it to like a normalized revenue level?

Well, the way we manage cost in this business, it might be a little different than what you hear from others. We and our leadership team, we worry about our corporate overhead costs, and so we manage those as needed based on what's going on in our business. The majority of our costs are in our branches and are in our field operating expense, and we actually don't put out emails and say, "You need to lay off people" or anything of that nature. Our incentive plan drives behavior. Every time I run a report at the end of the month with respect to what we've taken out of the business in the field, I'm, frankly, kind of surprised. I mean, I never expected that we'd be down over 700 in headcount since Q3 at this point, and it's not been because of some corporate edict or anything that we've done with respect to trying to marshal actions out in the field. It's simply because people are trying to manage their expenses as best as they can in a downturn to maximize their opportunity to possibly earn some incentives, even though the market is falling. So the field really takes care of each branch entrepreneurially, and they manage expenses accordingly.

Okay. All right. That's interesting. So in the second quarter, do you have an idea of how much more cost is coming out? Or is it still going to come up from the branches?

It's still going to come up through the branches. And I believe our guidance from the last call, which I've kind of reasserted on this call, of expecting 15% decrementals to SG&A is still valid. We beat in the quarter. We only had 10% outside of these onetime acquisition costs and pricing deterioration, but I still feel like that's pretty valid.

Okay, great. And if I could ask just one more on working capital items. I think you're kind of alluding to some inventories and other working capital cash inflow in the second quarter. Can we get an idea of how much? In inventory, is there anything that's -- where you've got it at prices that are below market?

Well, this is Dave Cherechinsky. Regarding inventory, when you go from a relatively strong market to a fairly bleak market like we're in, there's going to be some overcosted inventory, and we make adjustments for that each month. That's just kind of the nature of the beast in a downturn. And then, there's competitive pressures, again, for that inventory as us and our competitors and manufacturers try to generate cash in a market like this. So there'll be downward pressures on pipe, what we've talked about in the call. There'll be some cost adjustments on the inventory we have, but we've got to plan to significantly reduce inventory throughout the rest of the year. Same with the accounts receivable, where we made very nice progress in the quarters, especially in Canada, we were able to generate $180 million in additional cash because we're focused -- this is really where we focused in the downturn. In upturn, we're focused on growth and taking care of our customers and maximize margins. In a downturn, it's about generating cash from reduced capital expenditures, which will be down significantly in the year for us and pulling AR and inventory off the balance sheet prudently.

We manage inventory -- we don't have a LIFO, FIFO process here. We manage inventory in a moving average cost basis. So every month, if there's any over costing in our inventory, we're taking charges in the month. You're seeing them in our results. We don't have a onetime kind of reevaluation of inventory event.

Okay. Do you have a number of what that charge was during the quarter?

The charge for inventory?

Yes, how much, yes.

It was probably in the $3 million range.

Our next question comes from that Doug Becker from Banc of America.

I think you've made a very strong case to outperform the U.S. rig count again in the second quarter. That said, the U.S. rig counts on pace to decline something around 35% on average. Just trying to calibrate this a little bit better. Is something of a 15% to 25% decline in the U.S. reasonable in that type of rig count scenario?

Well, I think what you could do is come up with what you think the rig count is going to be and then look at our revenue per rig performance in the quarter and assume that we're going to perform somewhere similar to that. So it really depends on what you really decide that you believe the rig count is going to do.

This is Dave. I would add that we saw 800 rigs go away in the first quarter. And we haven't experienced the full effect of that at the field level. So you'll have some carryforward from a significant decline in rig activity.

As well as Canadian breakup.

That's right, Canadian breakup. And then the rig count declines we experienced in the second quarter. So...

Fair enough. And I mean, this is a difficult one as well, but as we think about 2015, if we assume rig count in the U.S. bottoms around the -- in the second quarter, flattens in the third quarter, maybe increases a little bit in the fourth quarter. From what we know now negative full year EPS, but EBITDA still positive?

Well, again, that's a matter of what's going to happen with rig count and revenues. Some think that the market will bottom in the second quarter. If 2009 is a good proxy for what's going to happen this year, that could happen. And we could see some recuperation in the third quarter and in the second half. So it's possible we'd be even on EBITDA for the year, but that's, like we said in last call, that's largely a function of our customer spending and market activity.

And our next question comes from Matt Duncan from Stephens.

I want to focus on the M&A a little bit. So Robert, make sure I understand correctly how we sort of annualize all these acquisitions you've done. It sounds like $54 million added sequentially 4Q to 1Q, another $30 million sequential uptick in the 2Q. So it's like $85 million a quarter of acquired revenue. Is that the right number to annualize?

That's correct.

All right. And then you've got, you said, mid to high single-digit EBITDA margin. So something kind of $20 million, $25 million of EBITDA from that revenue that you've acquired?

Well, I didn't do the math. But if you assume it's going to be 8% on $85 million a quarter, I guess, you're right, yes.

Okay, all right. That helps. And then, in terms of just the size of the deals and the pipeline, it sounds like you had a couple of pretty good size deals that you got closed here in the first quarter. Are there others of similar size in the pipeline you're thinking to get done this year?

Well, as you know, just because we have an LOI signed doesn't mean the deal will get done. But of the 4 LOIs that we have signed now that we're currently working through, they collectively represent a little over $300 million of revenue.

Okay. So another pretty good chunk if you can get them all to the finish line then.

If we can get them to the finish line. We never plan around them. We just take them as we get them done.

Yes, okay. And then in terms of how the revenue breaks up, Dave, I don't know if you have the numbers of the acquired revenue, how does it break up between both energy and supply chain, then also by geography?

It's probably a $30 million supply chain. It's probably 50-50, Matt.

Okay. And then, by geography, I guess, the one in the U.S. looks like it's supply chain. In the international stuff looks like it's energy branches. Is that that a good way to look at it?

By geography, a little more than $20 million in the U.S. and a little more than $30 million internationally. That was the increase sequentially. And you can use those same ratios to get to your $84 million for the...

David, the revenue in the U.S., that's supply chain revenue, right?

That is correct.

Okay. And then, last thing, I just want to make sure we understand what's going on with gross margins a little better. So if I take out the $5 million of inventory step-up charge, you were at 18.5%. Obviously, you're being hurt a little bit in the short term by some of the price concessions. Should we assume that those price concessions are probably going to continue until we start to see rig count recover so that your gross margin might stay around this level until that happens? Is that the right way to model that number?

Yes. I would say the $11 million of price erosion in the quarter from -- that's directly related to price concessions is largely most of the price of concessions we made. I mean, it's definitely the vast majority. And those will continue forward until we hit some of those triggers that we have in these agreements with our customers around oil price and rig count that allows us to reinstate prior pricing.

And we have no further questions at this time. I will now turn the call over to Robert Workman for closing comments.

I'd like to thank everyone for their interest in DistributionNOW and look forward to talking to you at our next earnings release. Thanks.

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