Dnow Inc. (DNOW) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Second Quarter Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Senior Vice President and Chief Financial Officer, Dan Molinaro. Mr. Molinaro, you may begin. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thank you Sylvia, and welcome, everyone, to the NOW, Inc. Second 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 conversations this morning. Before we begin this discussion on NOW, Inc.'s financial results for the second quarter ended June 30, 2015, please note that some of the statements we make during this call 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 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 also should be noted that we plan to file our second 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. Robert R. Workman - President, Chief Executive Officer & Director: Thanks, Dan. Welcome to DistributionNOW's Q2 2015 earnings call. Today we reported second quarter 2015 revenues of $750 million, and excluding other costs for acquisition related expenses and severance and EBITDA loss of $17 million, or a loss of $0.16 per fully diluted share. Included in our results is a charge of $7 million impact approximating $0.04 per share, resulting from high steel content inventory adjustments due to falling steel prices. If not for this deflation cost charge, EPS would have been a loss of $0.12. As I'm sure everyone on this call is keenly aware, it would be an understatement to describe the last two quarters in the upstream energy space as challenging. After experiencing Q1 2015 sequential rig count declines in the U.S., Canada and international segments of 28%, 24% and 4%, in Q2 2015 we realized additional sequential declines of 34%, 68%, and 7% respectively. In previous downturns of which none have been as severe as this cycle, revenues for our business have dropped from highs of around $1.3 million to as low as $950,000 per average global operating rig annually. This is a result of operators and drilling contractors destocking their rigs and warehouses and reducing their CapEx and operating expenses in the face of a severely declining market. We can only credit our employees for growing non-acquisition related annualized revenue for global operating rig from $1.1 million in both Q4 2014 and Q1 2015 to $1.2 million in Q2 2015 representing respectable organic market share growth in a business whose revenue is more than 80% levered towards the upstream market. Where some companies have assets, such as patents, highly engineered proprietary products or significant investments in PP&E and service equipment, our largest and most impactful assets are our employees. I'd like to thank them for the results they have continued to produce in the face of the most severe down cycle that I've experienced in my 24 years at DistributionNOW. In particular today, I'd like to say a special thank you to Marlyn Studer (5:00), who works in our Wilson Export group servicing global oil and gas operators. She joined us through the acquisition of Wilson Supply in 2012 and celebrated her 48th year with DistributionNOW at the end of June. Thanks Marilyn (5:14) for all you do for DNOW. Moving back to the top line and including acquisitions, annualized revenue per global operating rig grew sequentially by almost 18% to $1.38 million, almost tripled the 6% sequential M&A aided growth we delivered in Q1 2015. As expected, revenue added in Q2 2015 from acquisitions was about $30 million as compared to the $49 million from acquisitions that was added in the first quarter. The strengthening dollar affected sequential revenue in our Canadian and international segments by approximately $3 million with only a minimal impact on EBITDA. The price erosion impact of $11 million we experienced in the first quarter repeated in the second quarter, but did not degrade further sequentially. While towards the end of Q2 2015, we think that we likely experienced the full impact of price concessions made earlier in the year, we continue to feel margin pressures from increased project bidding in an oversupplied line pipe market with some analysts even predicting an elongated trough in this cycle. Decremental flow-through to operating profit was 16.8% sequentially. Looking more closely at the U.S. while we had sequential rig count declines of one-fourth and then one-third in the last two quarters, a handful of our core areas actually had much more severe declines. Leading the pack with rig count reductions were California, Tuscaloosa Marine Shale, Eaglebine and Permian in the U.S. Areas that were affected less than average sequential rig count decline were the Utica, Marcellus, Mid-Continent and Rockies. The revenue decline in the U.S. of 17% was primarily driven by volume reductions of almost one-third with our top five oil and gas operator customers and rig counts that maintained their downward progression, destocking of warehouses by operators and drilling rigs by contractors that continued throughout the quarter, wells being drilled but not completed that continued to grow, further outsourcing by customers' defabricators for turnkey projects, continued increases in the number of orders that would normally be placed on the branches at contract pricing being taken out for bid, severe weather in Colorado that slowed activity in April and May and heavy rains in Texas and Oklahoma in June, the winding down of projects and turnaround activity with several of our downstream customers, much lower volumes with our supply chain energy manufacturing customers as they cut back on production and several facility closures in both our upstream and downstream operations that while improving profitability resulted in partial revenue losses. Offsetting these challenges and what allowed the U.S. to produce revenues that significantly outperformed the 34% sequential rig count decline were increased maintenance projects with two of our largest operator customers in the Eagle Ford, strong activity with midstream customers in the Rockies and Eagle Ford and actuation and valve shipments to one of the largest midstream companies in the Northeast, growth in sales of artificial lift systems across most areas of the U.S., increased activity in the Southern Utica and the opening of a few new facilities to support our two largest supply chain operator customers that resulted in nice share gains through reduced leakage in the Permian. In Canada, revenue declined 23% sequentially, mainly due to significant reductions in the rig count, well completions, fiberglass line pipe projects in the Saskatchewan, Bakken and oil sands related projects. Enabling Canada to handily outperform the 68% sequential rig count decline were customers increasing their discipline by enforcing contracts with DNOW, increases with artificial lift systems, the acquisition of several operators by our largest oil and gas customer in the Canadian Bakken and the implementation of new contract awards that occurred in Q1 2015 across several areas in Canada. Internationally new revenue from our recently completed acquisitions of MacLean, Oasis and North Sea Cables increased artificial lift in multiplex pump packages in Australia and a pickup of PVS and electrical sales in Kazakhstan were enough to offset considerable declines with the shutdown of the (9:28) field in the Middle East, reduced coated line pipe and spools shipments to Kuwait, 9% and 12% sequential rig count declines in Latin America and Europe respectively and deepwater drillers who have been idling or scrapping rigs and cannibalizing the considerable amount of inventory maintained on those large vessels. Looking at market activity moving forward, considering the number of variables currently influencing the price of oil, such as U.S. shale and OPEC production growth, global demand, the Chinese economy, instability in the Middle East, the strength of the U.S. dollar, the possible lifting of sanctions in Iran, the potential to repeal the U.S. oil export ban, progress on U.S. LNG export facilities and many others, no one can accurately forecast what will happen in the energy market in the coming quarters. Several reports cite industry experts that range from $70 oil by the end of 2015 all the way to $50 oil for the next few years. Currently rig count changes and comparison to trends from prior downturns suggest that a recovery if it has begun will be one that is slow-going. The recent pullback in oil prices calls for a weaker demand over the second half of the year and what appears to be an oversupplied oil market and peak demand season make it difficult to conclusively make any determinations. Regardless of how the market reacts to all of these variables, we'll maintain our strong focus on continuing to deliver organic market share growth, pursuing M&A opportunities that strengthen or expand our product geographic and/or solutions offering to our customers and positioning the organization to take advantage of the market recovery irrespective of when that happens. Outside of the uneasy state of the market and in addition to approximately $25 million of revenue that will be added to Q3 2015 from our most recent three acquisitions, our growing participation in an active and stable midstream market should help bolster our revenue stream. Other bright spots include that for the 15 rigs that were put back to work in July in the U.S. we experienced start-up orders to restock them after being idled and cannibalized for months. While there weren't enough rigs put back to work to move the needle considerably, it confirmed our expectations that when a recovery happens, drilling contractors will place significant demands on our branches in order to restock cannibalized rig that are currently stacked today. We have experienced an increase in artificial lift sales in the U.S. and abroad as customers have moved their focus to optimizing production and away from exploration. We have no reason to believe that this trend as well as increased revenue with well service companies won't continue while we're in this period of the cycle. While not always a perfect indicator of future activity, drilling permits have increased in several of the shale plays and some of our largest oil and gas customers have commented that they plan to add a modest number of rigs in the second half of 2015. Due in part to the impending completion of LNG export terminals being constructed along the Gulf Coast, several customers are acquiring properties in and having exploration discussions for the Haynesville, Fayetteville and Barnett Shale plays. Over the last few months, about a dozen operators have notified us that we're now their primary supplier in several geographic regions in the U.S. where we have previously only enjoyed a portion of their purchases due to service level issues they are having. As well, one of the largest U.S. drilling contractors has recently awarded us Preferred Supplier status nationally which will aid us in growing share with that contractor. As mentioned on our last call, a recent supply chain services award with an oil and gas company who is one of the most active operators in a major shale play has already resulted in over 1 million of project awards and we have yet to conclude contract negotiations. Several projects in our downstream group that were pushed out in Q2 2015 should bill in Q3 2015 and we expect to see a resumption in turnaround activities. DNOW has contracts with four of the top eight operators that represent 80% of the drilling activity in Canada. Even though the recovery from breakup pales in comparison to prior years, we should still enjoy a pickup in revenues due to increased activity. Also in Q2 2015 in Canada two new contract awards and the execution of a new agreement with a large international oil company for pipe valves and fittings will begin producing organic growth in Q3 2015. We've also had two of our most significant commercial agreements in Canada extended recently. Resumption of fiberglass line pipe projects in Saskatchewan as well as a recent award by a fiberglass pipe manufacturer to DNOW as the distributor of spoolable fiberglass pipe should also bolster revenues in Canada. Our fiberglass team in Saskatchewan has also expanded to the U.S. Bakken in recent months which should begin to yield organic growth soon. Export project shipments to oil and gas operators in Angola, Oman and Pakistan should help soften reduced export shipments to offshore drilling contractors. In-country sales of artificial lift systems and multiplex pump packages in Australia, drilling spares in Indonesia, valve projects in Singapore and pipe, valves and fittings in Azerbaijan should help offset declines we're experiencing in Europe, Latin America, and with deepwater drillers globally. Moving beyond the top-line, less acquisitions, we have reduced head count by about 850 out of 5,300. 150 of which were in our corporate office and including just over 60 in the month of July. On the other side of that through the non-acquisitions we have completed since spin, we have added over 800 new employees. In Q2 2015, we consolidated or closed 11 underperforming branches globally. We continue to evaluate additional underperforming locations. This brings the total consolidations or closures to 26 for the first half of 2015. In the quarter, we also added eight new onsite branches in several areas of the U.S. and two branches in the Permian. We have reduced operating expenses by $28 million from the fourth quarter of 2014 to the second quarter of 2015, or by $41 million which is 23% when excluding acquisitions. Warehouse selling and administrative expenses have dropped from $179 million and $163 million in Q4 2014 and Q1 2015 respectively to $151 million in Q2 2015 which includes $13 million added through acquired companies. We've continued actions to right-size our business to this very low activity level and will continue doing so while making sure not to sacrifice our future and to position DNOW to prosper during an eventual market recovery. And taking a look at the balance sheet, we're still working diligently to reduce our working capital as a percent of revenue, having reduced about $146 million and $192 million sequentially in Q1 2015 and Q2 2015 respectively of inventory and receivables, less acquisitions in the period. Unfortunately with sharp declines in revenue that progress doesn't show up in days of sales outstanding, inventory turns or working capital as a percent of revenue metrics. We still have a lot to do in these areas, but are optimistic based on the considerable progress that was made in July. As we stated on the last call, these balance sheet reductions will only last as long as we remain in a depressed market. We have experienced market recoveries in the past and understand well the amount of cash needed to fund growth. So we're being mindful of that fact as we make capital allocation decisions. Sequentially, we went from a net debt position of $13 million in Q1 2015 to a net cash position of $34 million in Q2 2015. Due to falling steel prices, we made a $7 million adjustment in reducing inventory costs for steel intensive products. At the beginning of 2015, we weren't anticipating this event as several U.S. mills were being idled and the process still at the time was only slightly higher than the lows of 2009. Recent data suggests that imported steel goods are continuing to deflate and could be reaching up to 20% lower than the bottom we experienced in 2009. We suspect that we have yet to reach the bottom of the steel process as input costs continue to fall. Tubular demand both for OCTG and line pipe is low due to an oversupply, too much global pipe capacity for this type of market and a strong dollar, which makes imports cheaper in the U.S. As for domestic seamless line pipe, it still remains somewhat steady in price as many of the mills are currently idled or will shut down soon. By the middle of August likely only two of the six primary domestic mills will be running. We began our U.S. pipe inventory reductions shortly after the acquisition of Wilson Supply and have reduced those levels by around $70 million since peak. However, many large privately held pipe distributors were building inventory in 2014 and some were even buying heavily in the first Q of 2015. This has led to an oversupply of pipe market sometimes being held by the mills themselves that will put pressure on pipe sales and costing for quarters to come. Regarding capital allocation, we have consistently communicated that our maintenance CapEx should be in the $10 million to $20 million range. At this point, it appears as though our maintenance and spin related CapEx combined may be on the low side of that range. As for M&A, we recently completed our seventh and eighth acquisition since spin, announced the completion of our ninth deal earlier this week and just yesterday filed for HSR approval of our 10th and most recent opportunity. Expanding on some of these recent deals in Q2 2015, we closed the acquisition of an electrical distributor in Norway. Combined with the electrical businesses DNOW has operated in the North Sea for years along with a strong UK electrical presence of MacLean, DistributionNOW has expanded our capabilities to service our customers cable, (19:23) and lighting needs across all areas of the North Sea. The smaller of the three deals we have completed since the end of Q2 was a bolt-on acquisition to our Canadian operations that expands our valve, electrical and instrumentation business. As a young company with solid technical knowledge and expertise and valued customers and suppliers, but still has a lot of room for growth. On Monday we announced the completion of the acquisition of Odessa Pumps and Equipment. Headquartered in the Permian, Odessa Pumps provides a full line of fluid transfer equipment to the oil and gas and municipal wastewater markets. They have successfully expanded their geographic breadth beyond their home base in the Permian to the Eagle Ford, Mid Continent and New Mexico markets. Through that effort and with limited access to capital, they've grown revenues by over 50% in a four-year period. We feel confident that by having access to DNOW's considerable infrastructure and balance sheet capabilities, Odessa Pumps will be able to continue their organic growth performance across the product lines they represent that allow for continued geographic and end-user expansion. Odessa Pumps is also a great win for our supply chain solutions group, where our customers are constantly looking for us to invest in and expand the product lines we can provide to support their operations. Yesterday we filed for regulatory approval to acquire the business of Challenger Industries Incorporated. Headquartered in the heart of the Bakken and with operations across several areas of the U.S., Challenger provides pipe, valves and fittings to the downstream, midstream and upstream markets. With the majority of their revenue related to the downstream and midstream markets nationwide, Challenger strengthens our downstream service capabilities while also expanding our growing participation in the midstream market. Additionally, when considering opportunities to combine the strengths of their upstream operations mainly located in the Rockies with that of our energy branches in the same area, it will enhance our ability to service our combined customers in those resource plays. We're just as optimistic as ever that we will be able to put capital to work, that will not only generate returns for our shareholders, but that will better position DistributionNOW for an ultimate market recovery. While our M&A pipeline is plentiful, our primary focus is on finding those deals that are the greatest strategic fit, such as product line and geographic expansion, scale and financial strength as well as managing our existing acquisitions to deliver on their expected performance and generating value for our shareholders. Even though we have a lot of deals under our belt from our previous parent company and on our own, we believe in continuously evaluating what has worked and what could be improved in our deal process and in our integration efforts to preserve what these companies have built independently and enhance their success as part of DistributionNOW. We'll continue to be prudent in determining how we allocate capital and thank our shareholders for their confidence and support. With that, I'd like to thank you for your interest in DistributionNOW. And we'll now turn the call over to Dan to review the financial highlights. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Robert. It has been a little over a year since we spun off from NOV and I'm proud of the efforts throughout our company as we integrated three large distribution businesses in North America, converted most of our company to one worldwide ERP system and created an independent publicly traded company, a company which is a world-class provider of products and services to the energy industry. I am thankful for our dedicated hardworking employees who made this happen. They are the true assets here at DistributionNOW. We are facing headwinds from this uncertain market and this downturn is more severe than most others. But this is nothing new to our seasoned management team, who has proven resilient in similar past cycles. We'll continue to concentrate on the needs of our customers while focusing on producing results for our stakeholders. Robert discussed our business and I'll touch on our financials. NOW, Inc. reported a net loss of $19 million, or $0.18 per fully diluted share on a U.S. GAAP basis for the second quarter of 2015 on $750 million in revenues. This compares with a net loss of $10 million, or $0.09 per fully diluted share on $863 million revenue in the first quarter of 2015. And it compares with net income of $27 million, or $0.25 per fully diluted share on revenue of $952 million for the second quarter of 2014. It should be noted than an earnings comparison with the year ago quarter is not meaningful as Q2 2014 did not reflect the full costs of running an independent publicly traded company. Our second quarter results included $3 million of acquisition and severance related charges and when excluded, our net loss was $17 million or $0.16 per fully diluted share. Gross margin declined $31 million in Q2 to 16.5%, compared with 18.0% in the first quarter of 2015, reflecting reduced volume and continuing price pressure. Our Q2 margins are impacted primarily by a $7 million, $0.04 per share charge related to lower cost to market inventory adjustments for line pipe and other products due to falling steel prices. Operating profit was down $19 million sequentially as the gross margin decline was partially offset by operating expense reductions totaling $12 million. EBITDA for the second quarter of 2015 was a loss of $19 million, $17 million excluding the acquisition and severance-related charges. Looking at operating results for our three geographic segments, revenue in the United States was $496 million in the quarter ended June 30, 2015, down 17% sequentially and down 25% from the year ago quarter. The second quarter decrease was driven by the continued decline in the U.S. rig count, slightly offset by incremental revenue gain from acquisitions. Excluding the impact of acquisitions, U.S. revenues were down 17% sequentially, while the U.S. rig count declined 34% in the second quarter of 2015 as we continue to outperform the domestic rig counts. Operating profit in the U.S. for the second quarter 2015 was a loss of $23 million compared with a loss of $12 million for the first quarter and a profit of $28 million in Q2 2014, reflecting revenue declines coupled with the incremental costs of operating as an independent publicly-traded company. In Canada, second quarter revenue decreased 23% sequentially to $89 million and down 29% from Q2 2014, reflecting the sharp declines in the Canadian rig count and reduced spending in most regions during seasonal breakup, partially offset by an increase in large project and new contracts revenue. The Canadian dollar continued to decline relative to the U.S. dollar, falling another 2.3% in Q2, with the U.S. dollar strengthening continuing in July adversely impacting revenue. Canadian operating profit for the three months ended June 30, 2015, was a loss of $5 million, compared with a profit of $3 million in Q1 2015 and with a profit of $2 million in the year ago quarter. The decrease in OP was essentially due to revenue declines. International revenue was $165 million in the second quarter, up 13% sequentially and even with the second quarter of last year. Second quarter revenue includes $60 million from companies acquired in 2015, compared with $30 million in the first quarter of this year. Excluding acquisitions, international revenues were down slightly reflecting reduced market activity and customer spending. International operating profit for the second quarter of 2015 was $1 million, the same as Q1 2015, but down $12 million from the year ago quarter. We continue to be optimistic about our international opportunities. Revenue channels for the second quarter shows 76% through our Energy Branches, or stores as many of us know them, with declines across the board geographically as our upstream business suffers, and 24% through our supply chain locations, which shows the strength in the supply chain group, which also benefited by our acquisition activity. Looking at the income statement, I wanted to remind you of a reporting change made earlier this year. We combined operating and warehousing costs with selling, general and administrative expenses and now report as warehousing, selling and administrative expenses. We believe this change provides a more meaningful measure of our operating expenses and including operating and warehousing costs within SG&A is more meaningful to users of our financial information. Plus this will be more consistent with our peers. Looking at the pieces; operating and warehousing costs were $99 million for the three months ended June 30, 2015. This is down $4 million from Q1 2015 and down $6 million from the year ago quarter. These costs include branch and distribution center expenses. SG&A expense was $52 million in the recently completed quarter down $8 million from the previous quarter, but up $7 million over Q2 2014. The increase over the year ago quarter is related to the net incremental costs in connection with operating as an independent company, spin activities and ERP conversion and implementation, as well as SG&A that came with the acquisitions we completed since the spin. In total, we have reduced our quarterly warehousing, selling and administrative expenses by approximately $28 million for the fourth quarter of 2014, or almost 15%, and these costs were down by $41 million when the impact of acquisitions was excluded. The effective tax rate for the second quarter of 2015 was 34%, and we expect the effective tax rate to approximate 32% for the full year. Turning to the balance sheet, NOW, Inc. had working capital of $1.28 billion of June 30, 2015. Accounts receivable was $665 million at the end of Q2, a reduction of $132 million during the quarter. For the first half of this year, we reduced AR approximately $240 million, or some 29%, before the additions from acquisitions. Inventory was $892 million or $53 million lower than the end of the first quarter. We have slowed the inventory replenishment process and should show significant reductions in the second half. Cash totaled $114 million at June 30, 2015, which was down $8 million during the quarter. Almost 80% of our cash is located outside the U.S. as our U.S. cash is used to repay bank debt. Capital expenditures during Q2 were $3 million. Our maintenance CapEx normally runs $10 million to $20 million annually, but as Robert mentioned, should be on the low side of this range this year. Our current day sales outstanding are slightly improved to the low 80s, but impacted by the lower revenues and we continue to work on improving these results to closer to the 60-day range. Inventory turns were 2.8 times, but we believe we'll return to at least four turns. On a trailing 12-month basis, our working capital was 35% of sales, 32% when cash is excluded, but higher if you annualize the quarters with our objective of getting to a 25% rate. We ended the second quarter with $80 million of bank debt having paid off $55 million of debt during the quarter, and considering our cash position, we were net cash. Our borrowing costs approximated 1.7%, and we continue to have plenty of dry powder as we consider growth opportunities for DNOW. The third quarter 2015 will continue to be challenging as we deal with this downturn, but our focus remains on our customers. We will continue integrating our recent acquisitions, identifying synergies to reduce cost. We have confidence in our strategy and our employees and in our future, as we position NOW, Inc. to continue to serve the energy and industrial market 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, Sylvia, let's open it up to questions.

Thank you. We will now begin the question-and-answer session. And our first question comes from Matt Duncan from Stephens.

Good morning, guys. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Good morning, Matt. Robert R. Workman - President, Chief Executive Officer & Director: Good morning, Matt.

First question, Robert, just on all the M&A that you guys have done recently, I can certainly appreciate you may not want to size up each deal individually. But can you give us some idea how much you've added to annual sales with Odessa Pumps and Challenger combined, which appear to be the two bigger ones that you've done since the last call? Robert R. Workman - President, Chief Executive Officer & Director: Yes, we're not going to comment on Challenger yet because we haven't acquired them. And there is no guarantee that it will pass HSR, so we're going to leave that one out of the commentary. But we've had $5 million added in Q4 last year and we had $49 million added in Q1 and we had $30 million added in Q2 and we expect $25 million added in this quarter.

Okay. Roughly how big is the Odessa Pumps business if you go back to pre-downturn? How big is that business? And then in terms of their product lines, are you guys going to be able to take most of what they sell and spread it across your footprint or are some of their pump lines especially going to have some geographic restrictions to them? Robert R. Workman - President, Chief Executive Officer & Director: Well, we'll continue to give you our acquisition revenues added in the quarter, but I'm not going to separate out each acquisition. But it was big enough that we had to file HSR. Odessa Pumps has a wide range of products that they represent, one of which overlaps with ours which is National Oilwell Varco multiplex pumps, which are those large triplex pumps that we fabricate skids for and put prime movers and build buildings and ship to the oil plays to move fluids through pipelines. So that's a complementary product line for us. We have three facilities in DistributionNOW that do that alone. The other product lines they represent are a variety of styles of pumps that have specific applications, and these are tightly managed channels to market. So one pump of their product line, the manufacturer may say, hey, it's nationwide, get after it, do everything you can to grow revenue. One of their product line the manufacturer may say, 'hey, it's nationwide. Get after it. Do everything you can to grow revenue'. One of their other product lines may say, 'no, we only want you to stay in your current geographic area. Do not go outside of these bounds.' And so there's going to be a mix of both of those and so we plan to start from the position of living within those constraints by each manufacturer and then hopefully gain their confidence in how we grow their revenue streams in whatever geographic region we're allowed to participate and then our goal would be for them to come back and say, 'you guys have done a really good. Try this area or take it to this area where we're not doing so well'. So it's going to be a mixed bag; some immediately we can sell everywhere, some we'll have to stick within their geography.

Okay. And then just a couple quick numbers question and I'll hop back in queue. Dan, what was free cash flow in the quarter? And then also I missed the numbers you gave on the breakdown of revenues between Energy Branches and Supply Chain, if you could just give me that again, I'd appreciate it. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: The Energy Branch was 76% and supply Chain was 24%, which is real close to what the first quarter was, too, Matt, obviously with revenue down and the upstream piece is down further. Free cash flow would be probably a minus 20%.

Okay. Thanks. I'll hop back in queue. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Sure.

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

Hi, thanks. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hey, Walt, how are you doing?

Hey, good. Just a follow-on to the last one on acquisitions, with the revenue compressing on some of the acquisitions, how are you going about with evaluation and how should we think about accretion in 2016? Robert R. Workman - President, Chief Executive Officer & Director: Well, most of the acquisitions we've completed so far are affected by the energy market, whether they are overseas or in the states. And so we've looked at valuations based on their current P&L and we're living within those same multiples we've always talked about in that four to six range based on the current P&L. So they're immediately accretive deals for us as we acquire them at really reasonably prices. And then obviously when the market recovers, the multiples that we paid would have looked a lot better than the four to six range. So we're living in a word we wouldn't be doing acquisitions if we felt like the energy market would never rebound, and we don't want to wait until the market starts strengthening to start doing acquisitions because at that point you're going to pay a lot more than you do now. So we're trying to take advantage of the down market.

Okay. Yeah, that sounds promising. And then you mentioned artificial lift a couple of times and I wonder if there's a way that we can get more color on it. I mean when an artificial lift goes in, how much revenue is there attributed to it and what kind of penetration rates are we looking at as producers try and increase production? Robert R. Workman - President, Chief Executive Officer & Director: It's hard to quantify artificial lift per well because there's not like it's one system. So in some cases, like in Australia, we're selling the big bean (38:54) unit, the pump jack plus the sucker rods plus the new rod pump which is a lot more expensive than a customer that's pulling pumps out of the ground that we'll repair and bring back to them to run back down in a hole. So artificial lift is a broad range of different levels of revenue depending on what kind of project it is. We also do plunger lift systems, we do progressing cavity pump systems, we do hydraulic pumping units, so it depends on the customer's field and which kind of artificial lift they are employing. And it's really hard to quantify that across any of our geographies because there's different products involved that are sold actually through the branches, okay. So it's not a separate unit that does artificial lift. It's part of our branch business.

Okay. Got it. Well, it sounds like this is kind of a bright spot to look forward to in the back half of the year. I wonder about the trends. Have you started seeing artificial lift pick up during the quarter or is it something that you expect in the back half to get better? Robert R. Workman - President, Chief Executive Officer & Director: No. It's been increasing, I would say starting a little bit in Q1 and then much heavier in Q2, and we expect it to continue to climb in Q3. The degree is almost impossible to forecast because you never know what customers are going to do with respect to working over their wells, but it is a bright spot in our revenue stream.

Okay, got it. All right. Thank you.

And the next question comes from Jeff Hammond from KeyBanc Capital Markets. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Jeff.

Hi, guys. This is James filling in for Jeff. Robert R. Workman - President, Chief Executive Officer & Director: Okay.

Just starting with the International segment, first half running at a 35% core decline and of course you guys did talk about the puts and takes there in the quarter. How are you guys thinking about the back half here for that segment, for that business? Robert R. Workman - President, Chief Executive Officer & Director: Well, the International segment for us is by far the lumpiest piece of our business because it's so project oriented in that we ship large amounts of goods to like an Iraq field or into Asia or a rig gets pulled into Singapore and they have to do a big refurbishment job, which could be large order. So it's never consistent based on rig count like Canada and the U.S. The Canada and U.S. are much more closely correlated to rig count shift. So we had some projects in Q2 that were pushed to Q3, but they weren't enough that you're going to see a massive pop in our International revenues. It's a pretty depressed market. It's very volatile right now for all of the reasons I mentioned earlier with all of the things going on in the Middle East and the Chinese economy and the rest and the North Sea and the offshore drillers. So we don't have big hopes that you're going to see a big pop in revenue in the International segment, especially with as depressed as the offshore market is right now.

And then you also provided a lot of great color regarding the pricing environment for line pipe and tubulars. Does the pricing erosion sort of sustain at this $11 million level or is there further downside to go? Robert R. Workman - President, Chief Executive Officer & Director: Well, there's two areas of the market that are depressing those margins, which would be further deterioration in pricing and in an over-supply that continues to cause issues in the line pipe market as well. So we didn't experience any sequential decline in Q2 from Q1. We just repeated what we experienced in Q1. I think if we have any margin decline, it won't be from any kind of pricing concessions. It's going to be from further project bidding and people trying to dump inventory where they've got an oversupply. So we could see more pricing pressure in Q3 and Q4 just simply due to that.

Okay. Thanks. I'll get back in the queue.

And our next question comes from Sam Darkatsh from Raymond James. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Sam. Sam J. Darkatsh - Raymond James & Associates, Inc.: Good morning, Rob. Rob, Dan, Dave, how are you? Robert R. Workman - President, Chief Executive Officer & Director: We're fine. How are you? Sam J. Darkatsh - Raymond James & Associates, Inc.: I'm doing fine. Thank you. A couple of quick questions, and one of them is piggybacking on a prior question. You mentioned not just the artificial lift but there's median of factors that are allowing you to outgrow or outperform the rig declines in the U.S. and Canada, be it with maintenance projects, be it Southern Utica, Midstream Rockies, new awards, what have you. How sustainable or what's the trend of that over the next couple quarters in terms of what your expected performance might be versus rig count in 3Q and 4Q in the U.S. and Canada? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Well, we've grown the organic piece less M&A over the last three quarters, only slightly in Q1 but even more significantly in Q2. I don't know where that could go from here. It really depends on what happens to our competitors in this depressed market. A lot of that's market share gains because they either don't have the balance sheets to fund their businesses or they're closing locations or were winning contracts, and it's hard to forecast how those are going to turn out. So, I would simply, for modeling purposes, assume that we're going to repeat our current global annual revenue per rig going forward based on whatever you think the market's going to do from a rig count perspective and then just add in any acquisition revenues we give you. Sam J. Darkatsh - Raymond James & Associates, Inc.: Got you. And then the second question. I believe last quarter you were pegging a combination of receivables and inventories by yearend, about $300 million to $350 million below Q1 levels. Is that still where you stand? I know there's been a bunch of moving parts with working capital between now and then. Where do you think receivables and inventories in the aggregate look by the yearend? Robert R. Workman - President, Chief Executive Officer & Director: We think in the second half of this year, unless anything we add through acquisitions, basically our original receivables and inventory balances for DistributionNOW , that we should be able to pull another $250 million to $300 million off the balance sheet. We've done a good job so far. We've closed seven acquisitions through Q2 and we still have a net cash position. So we're going to pull in enough cash off the balance sheet to fund these acquisitions. Sam J. Darkatsh - Raymond James & Associates, Inc.: Last question, Rob. This probably is more qualitative because you have to be a bit mindful of talking about individual acquisitions, I understand. But the folks that are interested or increasingly interested in selling at this point, folks that you're looking to acquire, could you qualitatively talk about the quality of those businesses? Are these distressed operators? What do the margins look like versus the company average right now or is there another reason, impetus why they might be selling now as opposed to when the market turns? Robert R. Workman - President, Chief Executive Officer & Director: There's a lots of reasons why these companies sell, but I'll preface this by saying, we're not in the turnaround business. So there's several acquisitions out there that I was pretty excited about, but once we got the financials and saw how poorly they're performing in this market, we decided to pass even though they had a nice top line. They just had bottom line numbers that would have not been accretive to our targets or where we're headed. The ones we've gotten so far there's all sorts of reasons why. Odessa Pumps has its own story and the owner of Odessa Pumps is staying with us. He's a great guy. He is passionate about being part of company, but he has his own personal reason why he wanted to go ahead and sell on. There's others that had really invested. They were privately held companies in the 2014 growth that assumed 2015 was going to look a lot like 2014 that got themselves in a position of having almost no cash, a tremendous amount of debt and were getting beat up by their bankers and by their suppliers, but still had mid- to high-single digit EBITDA margins. But their revenues had fallen to the point that they couldn't fund their balance sheet. So, I could give you 12 others reasons why companies are selling, but generally, we don't get into the position of buying a distressed firm thinking that we can go in and fix it and turn it around. We've got other things to do and there's plenty of opportunities out there that would involve that kind of consumption of our resources to turn their companies around. Sam J. Darkatsh - Raymond James & Associates, Inc.: Final housekeeping question and I'll pass to others. The four times to six times the current EBITDA or the current P&L you referred to, is that expected 2015? Is that trailing? What does current P&L mean? Robert R. Workman - President, Chief Executive Officer & Director: That's our forecast for the future 12 months. Sam J. Darkatsh - Raymond James & Associates, Inc.: Very helpful. Thank you, Rob. Appreciate it.

And the next question comes from Chuck Minervino from Susquehanna.

Hi. Good morning. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Chuck.

Hi, Chuck.

I just wanted to touch on margins a little bit more here. I think you mentioned in your prepared remarks that you reduced head count another 80 employees or something in July. I'm assuming you're kind of prepping for a little bit of a slower for longer kind of rig count period. Can you talk about assuming your revenues are roughly flat in 3Q, how you see margins transpiring for some of these other business lines in 3Q, 4Q?

This is Dave, Chuck. We see our current expense level being in that $151 million, maybe south by $5 million in the third quarter and fourth quarter. We, like Robert had said earlier, pulled $41 million expense out of the business on a quarterly basis, so we're real sensitive to cutting too much before what ultimately will be a recovery. So we think $150 million, maybe $5 million less in the third quarter and fourth quarters, that would be a target number. In terms of gross margins, like we alluded to earlier, there's still over costed pipe in the market, and there's a big influx of goods coming in from overseas, which are further pressuring costs and replacement cost for inventory. So we'll see pressures on that. So we'll try to offset that as much as possible with cost reductions, recognizing we're getting close to going too far if the recovery is imminent, but our real offset to that would be product cost and deflationary impacts. Robert R. Workman - President, Chief Executive Officer & Director: And let me expand on that a little bit. Dave quoted the $151 million number. That's with acquisitions. So if you look at our expense base that we had starting in Q4, it was $179 million a quarter. We dropped that without acquisitions in Q2 to $138 million. That's a huge reduction in our business and we're getting to the point now where we have to really think about each step we take going forward. I wouldn't expect that $138 million without acquisitions to drop much further than the $135 million number, but the $151 million number could actually go up. We already closed Odessa Pumps, so that will add expenses.

That's right. Robert R. Workman - President, Chief Executive Officer & Director: And if we close Challenger, that's going to add more expenses. So you'll see revenue come with those as well, but $151 million could actually grow, depending on our success rate of closing acquisitions, but our core business will continue to reduce expenses.

Got it. Okay. And you mentioned Challenger there. I think you also mentioned in your prepared remarks an incremental $25 million of revenues in 3Q from acquisitions, is that excluding Challenger or is that assuming that closes? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. We never assume we're going to close a deal and include numbers. So that only includes all acquisitions through Odessa Pumps. Now, we're hitting with this historically in August, a slow period in the government, so while we got early termination on Odessa Pumps, we don't expect the same thing to happen for Challenger simply because they're on vacations and on the beaches and all that neat stuff. So, we did not include any expense forecast or any revenue improvements related to Challenger in our numbers.

Got it, so that's more likely a 4Q kind of impact, assuming it does close? Robert R. Workman - President, Chief Executive Officer & Director: If the government gives us early termination, which we're not expecting, but say they do, then it'll close in the quarter, but if things go the way we think they will, it might be a close, the first day of the fourth quarter.

Got it. One last one for me, just more I guess a little bit more theoretical. This destocking process, you guys seem like you're willing to take your inventories down, let them kind of run lower, I'm sure your customer are doing the same, cannibalizing what they have to. In your experience in this space, going back to your time at NOV as well, how long, I mean, if you say you stay in like this kind of a flat rig count environment for a while, is there a point when customers have to stop destocking and when that kind of opportunity runs out and they're forced to start buying equipment again. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. Our rule of thumb is, as a rig, as one rig gets stacked, it has enough inventory on it to support operating rig for anywhere from six weeks to eight weeks. So, the big deal here is, there's probably two rigs and three rigs and four rigs stacked for every rig operating right now, so that's quite a bit of inventory to support these rigs. But it was a very nice uptick with respect to seeing the amount of inventory that the 15 rigs-or-so in July that got put back to work had to acquire in order to operate. So, this game is always – this (52:23) business is always about being able to forecast the future, which is really hard, whether you're in the pipe market or the drilling market or the valve market. So, our challenge will be to see the rig count improving fast enough to get our inventories up, so that we can meet demand from the customers and that'll just be something we'll have to do as a touch and go as we go forward.

Actually just one last one then. Those incremental revenues that you got from those rigs going back to work, I don't know if you could break it out that way, but would you say that that was accretive to margins, those incremental revenues? Robert R. Workman - President, Chief Executive Officer & Director: Absolutely, because if you think about a branch that had to get those orders out to those rigs, they didn't add any expense to do that unless it was freight or fuel, but we didn't add head count to do that. So, most of the margin flows straight to the bottom line.

Got it. Thank you. Thank you very much.

Our following question comes from Flavio Campos from Credit Suisse. Robert R. Workman - President, Chief Executive Officer & Director: Hey Flavio. Flavio S. Campos - Credit Suisse Securities (USA) LLC (Broker): Hi there, thank you. Thank you for taking my questions. So, just from a more high level perspective, on the acquisitions we've seen so far, we've seen a little bit of everything, right (53:37) with pumps distribution, which is a little bit on the higher margin, good for mix, we've seen PVF on the downstream and midstream, and we're seeing international targets as well. Are we agnostic throughout these three strategies, do we have any preferences towards any specific area for acquisitions or is the company going to remain opportunistic here? Robert R. Workman - President, Chief Executive Officer & Director: Yeah, we're definitely going to remain opportunistic but we do have the core areas that we have stated, you know, in every meeting we have had with shareholders about where we are going to invest, it's also in our presentation as well. But we're going to stick within our focus with respect to growing our presence in the downstream and midstream markets or strengthening our upstream presence or expanding geographically internationally or growing our core product lines, like valve actuation, electrical and the rest. So, that's kind of been our tragedy since day one and all of our acquisitions so far have been within that frame of mind? Flavio S. Campos - Credit Suisse Securities (USA) LLC (Broker): Perfect. That's helpful. And when you look at your footprint right now, we've had the 26 branch closures, now the ERP is behind you, I know that originally the strategy with Wilson was to focus on the branch strategy and not as much on the DC model that Wilson had and that has been changing a little bit. Are we switching this strategy towards a little bit more centralized distribution or are we still focused on branches and how does that impact your warehousing costs going forward? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, as soon as we acquired – we were not a distribution center style model at National Oilwell and Wilson very much was. So, the first thing we did, even prior to closing Wilson, when we could get data was to analyze the cost of having the DC model and looking at returns and the amount of capital employed involved and the effect on margins and rebates and all of that stuff. And we determined that it was a good model, that it was better than having each branch carry all that inventory on their own. So, we adopted their model day one. We invested in some systems enhancements to help that process along. We have a 0.5 million square foot DC here in Houston, we have got them on both coasts in the U.S. and California, New Jersey, we've got two up in Edmonton, one in Estevan, Canada, Singapore, Dubai, and all over the place. So we adopted that model since we acquired Wilson and invested in enhancing and bringing efficiencies to it, so we plan to keep that model. Flavio S. Campos - Credit Suisse Securities (USA) LLC (Broker): Perfect. Perfect. That's helpful. And just if I can sneak in a last one on the gross margin, are you still seeing some pressure coming down Q3, Q4, since we don't have a lot of history here, can you put the current like under 17% gross margin that we saw in the quarter in perspective a little bit? I know it's difficult because of the merger, but can you put it a little bit in perspective on how close this is to the depths of the prior cycle?

Well, this is Dave, Flavio. Our gross margins are lower than they were in the depths of the last cycle, in part because today we're seeing $46 oil where August 2009, the last big downturn, we had $71 oil prices, so manufacturers, distributors, customers, everyone is scrambling to generate cash and there's additional influx of products coming into the market where this wasn't happening six years ago. So with more products coming in everyone is trying to offload inventory, especially the smaller players trying to generate cash. So we're seeing kind of an anomalous impact that didn't persist as long as it's persisting now in the last downturn. So, what we need is some resumptions in rig activity and we're seeing a little bit of that percolate but that's going to be delayed as oil prices are so low. So this is lower than we saw last time. Robert R. Workman - President, Chief Executive Officer & Director: And Flavio, just to give you a couple of data points, for one particular grade of pipe, which was a ERW import X42, in December 2008 the price per ton was $1550, and at the bottom of the drop in the 2008-2009 cycle was $720. When we started out in October 2014 at $820, higher than the $720 bottom in the last cycle and the latest data we've got shows it's below $600 now, so it's more severe this cycle than last. Flavio S. Campos - Credit Suisse Securities (USA) LLC (Broker): That makes sense. That makes sense. Very, very helpful. Thank you for taking my questions.

Our last question will come from Sean Meakim from JPMorgan. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Sean.

Hey, Sean.

Thanks. Good morning. Just wanted to touch a little bit more on working capital, you noted that a lot of the changes underway inside the company aren't really showing up yet in the metrics given the downturn. Can you give us a sense of how much of the changes are structural versus cyclical, meaning any recovery, could you see a faster closing of the gap towards some of your targets given the progress that you made? Robert R. Workman - President, Chief Executive Officer & Director: What kind of targets are you referring to, Sean?

For working capital relative to revenue. Robert R. Workman - President, Chief Executive Officer & Director: Okay. Okay. Got it. Yeah, we're clearly not where we want to be. So we started this process thinking we'd see some recovery. We saw 2009 as a proxy for what's going to happen this year, that hasn't happened. So we have more inventory than we'd normally have. We're burning that down. We're seeing some very nice progress in our accounts receivable reductions. It's going to take a little longer to get to those working capital targets, but it is except for market share, or growth in how we take care of our customers, cleaning up that balance sheet is priority number one around here. So you will see improvements in the third quarter and, you know, graduated improvements in the coming quarters as well, so that's a top priority, in absolute dollar terms, like Dan as said, we have made progress, in ratio terms we have not, but that's the number one focus here.

Okay. And then just one last thing on the shifts in the rig count, last cycle versus this cycle, in the current environment, (1:00:05) even more towards the high-spec rigs is the ones that have kept working. In a recovery, I think we're likely to see the high-spec rigs that are available go back to work first. Given that shift in mix compared to last cycle coming out of the downturn, how does that impact your business? Robert R. Workman - President, Chief Executive Officer & Director: So outside of the one-time pops we're going to get because some of these rigs are going to have to buy a lot of material to get back to work. On a regular maintenance perspective, month-to-month, they're very similar in how much goods they consume. It's a different mix and some of the – they consume less goods, but the goods are a lot more expensive because they have a lot more high-tech equipment on there. So generally, we – and we've done this – we did that through last year actually. In 2014, we started measuring revenue per rig and comparing some of the SCR and the mechanical rigs to the AC rigs, and it was almost negligible, the difference amount of revenue it took to maintain those rigs on an operating basis.

And margins any different or margins are also very similar? Robert R. Workman - President, Chief Executive Officer & Director: They are very similar. Almost every contractor we sell to we've got a contract with. And so, it's not like we can price these orders as they order. It's automatically system priced and we know the margins.

Right. Okay. That makes sense. Thanks, Robert.

We have no further questions. I'd like to turn the call back over to Mr. Molinaro. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Actually, Robert will wrap it up. Robert R. Workman - President, Chief Executive Officer & Director: I want to thank everybody for their interest in DistributionNOW and we look forward to talking to you next quarter about our results in Q3. Thanks. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thank you.

Thank you.

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