Dnow Inc. (DNOW) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Third Quarter Earnings Conference Call. My name is Corey, and I will be 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, Daniel Molinaro. Mr. Molinaro, you may begin. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thank you, Corey, and welcome, everyone, to the NOW, Inc. third 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. In addition to these brands, we are very excited about new brands added to the DNOW family, including MacLean Electrical, Machine Tools Supply, and Odessa Pumps and Equipment, among others. Before we begin this discussion on NOW, Inc.'s financial results for the third quarter ended September 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 year. I refer you to the latest Forms 10-K and 10-Q that NOW, Inc. has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information 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 third 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 Q3 2015 earnings call. Today, we reported revenues of $753 million and a net loss of $224 million for the third quarter of 2015. When excluding costs related to acquisitions, severance, and a non-cash impairment of goodwill, earnings per share for the quarter is a loss of $0.17. Further, excluding amounts related to steel price devaluation, the per share loss in the third quarter is $0.07. Free cash flow in the quarter was $161 million, an increase of $215 million from the third quarter of 2014 and an increase of $70 million sequentially. We maintain the business in a net cash position sequentially, even after completing two more acquisitions. We also have a $750 million line of credit available, plus a $250 million accordion provision. Our operating loss of $291 million in the quarter includes $4 million of acquisition-related expenses, $1 million of severance, and $16 million of inventory cost adjustments resulting from continued deflation of high steel content products, primarily welded and import seamless pipe. As well, we performed a goodwill analysis, which includes $333 million of goodwill we carried with DNOW at the time of spin and estimated that we had a non-cash goodwill impairment of $255 million, the vast majority of which came from the full impairment of our U.S. energy reporting unit. This interim goodwill impairment analysis was performed after we observed an inversion of the recovery from three months ago when oil prices were improving and rig count gains were being seen in the U.S. to a current and forecasted double-dip environment where industry benchmarks on oil prices, rig counts and customer capital budgets indicate a prolonged downturn. Since we have yet to complete purchase price allocation accounting for the most recent three acquisitions and due to the complexities involved in determining the implied values of the company's reporting units' goodwill, we will firm up these estimates in Q4 2015. Steel prices for imported welded pipe have now fallen well below 2009 levels, and we are just beginning to see deflation in our seamless line pipe products, even though U.S. mills have been very disciplined about taking production offline. Many of our manufacturers are seeing a falloff of 50% or more in volume. The slowdown in the Chinese economy is pushing commodity prices lower as steel input costs continue to head downward. Unstable commodity prices, coupled with the strength of the U.S. dollar and the downturn in the energy sector, has caused the manufacturers' plant load to fall as low as 10% to 15% of capacity with some pipe mills. We have begun to see some bankruptcies from the pipe mills and further shutdowns. In the fourth quarter, we are seeing raw material prices for scrap, hot-rolled coil, and most commodities drop further. It is difficult to determine if the drop will continue or flatten out and what effect it will have on finished goods. I would like to think that we are near the lows regarding steel prices, but the factors previously mentioned make it difficult to predict our manufacturers' price bottom or their input costs. Before moving into a discussion about the business, and as I have in each of our prior earnings calls, I'd like to recognize one of our most tenured employees. If I continue doing so in chronological order, the next person in line would be a gentleman here in the room with me, who has asked me to skip over him. And just for the record, his name is not Dave. So in that light, I would like to recognize Junior Martinez (06:40), who just two weeks ago celebrated his 45th year at DistributionNOW. I have made many customer calls with him in the Vernal, Utah area, dating back to the early 1990s. Junior, thanks for all you do for DNOW. Regarding the market environment, we are in a decline like no other I have experienced, not only in my 24 years in this business, but also as a kid growing up in the energy industry. I was born and raised in a small town in the Permian Basin where my parents owned an oilfield service company. I never thought the market could decline again as sharply and severely as it did in the 1980s while I watched my parents struggle to make payroll, but I have clearly been proven wrong. We continue to see rig counts being reduced, projects being canceled, budgets being slashed, and inventory being cannibalized. Yet, through all of this, our world-class team of employees continue to find innovative ways to service our customers and grow our share of participation with them. Where we have historically experienced reductions in global revenue per operating rig in a declining market, due to customers reining in spending, as well as cannibalizing existing inventories on drilling rigs and in warehouses, our revenue per global operating rig continues to be strong. Excluding acquisitions, our annualized revenue per global operating rig has grown from $1.1 million at the peak of the cycle in 2014 to $1.2 million in Q2 and Q3 of this year. Including acquisitions, annualized revenue per global operating rig for the third quarter was flat sequentially at $1.4 million with $20 million of incremental acquisition revenue in the quarter from Odessa Pumps and a small valve and actuation business in Canada. Due to FX-related headwinds, revenues were negatively affected by $8 million sequentially and $27 million year-over-year. I would like to thank all of our hard-working employees for producing these share gains, not only in the face of shifting customer habits that occur in a declining market, but in this recent market paradigm where the industry is building an inventory of drilled but uncompleted wells, which are currently estimated to exceed 4,500. While these uncompleted wells have reduced the revenue opportunity for operating drilling rigs for our business today, they will provide a platform for growth in the future when commodity prices improve and customers complete these wells and build tank batteries on the well pad. We are maintaining our focus on growing organic market share, decreasing expenses, reducing risk on the balance sheet, generating cash, positioning DNOW to take advantage of an eventual market recovery, and remaining active and flexible in allocating capital towards M&A. While revenue with operators and drilling contractors in the U.S. continued to decline in the quarter, increases with a half-dozen midstream customers in the Eagle Ford, Permian and Marcellus helped offset these declines. Also in the U.S., we experienced an increase in activity with one of our longstanding supply chain customers in the Eagle Ford and Delaware Basin and began implementing a new supply chain customer in the Bakken, Utica, Permian and Gulf of Mexico. All of these share gains enabled the U.S. segment to outperform the sequential rig count decline of 5%, even after excluding acquisitions. While recovery from breakup in Canada has been bleak at best, off by about 50% from last year, we were successful in executing several new pipe, valves and fittings contracts with companies such as Synovus, as well as renewing our agreement with Repsol. We also entered into a partnership for the supply of pipe, fittings and flanges with Canadian oil sands operator Syncrude, as well as Imperial's Kearl. All are expected to produce market share gains in the coming quarters. Sequentially, revenues in our international segment were only down slightly with declines related to a strengthening U.S. dollar, non-repeating projects in Oman, Kuwait, and the CIS, and a continued stacking and scrapping of the offshore drilling fleet mostly being offset by large shipments to the Wheatstone Project in Australia and valve projects with shale in Iraq and diamond offshore in Brazil. While customers continue to pressure us to reduce prices and project bidding remains at heightened levels, product margins in the quarter did not deteriorate further sequentially, a trend that has continued for two quarters and one that we hope holds firm in future periods, especially considering current market pressures. Since the peak in late 2014, we have reduced non-acquisition head count by over 1,100 or about 21%, and we have closed or consolidated 10 branches in the quarter or about 40 year-to-date. Almost 100 of these head count reductions occurred in October of 2015 as we continue reducing expenses to match market conditions. The result of these expense management efforts is an annualized, non-acquisition expense decrease of about $180 million. Through the nine acquisitions we have completed in the last year, we have added almost 800 employees and about 40 new branches. We continued our strong focus on reducing inventory and receivables in the period and improved working capital as a percent of revenue to 38% or 34% when including $126 million of cash on hand. Looking at market activity moving forward, forecasts for reaching the bottom of the cycle and for the timing of an eventual recovery vary greatly. Where we are seeing clear signs in oil price recovery from February through June 2015 after the January 2015 lows, that recovery pattern has since inverted, and oil prices have fallen back to the January 2015 levels. Some analysts and companies are calling for an early recovery in 2016, and others have pushed out their forecasts for an increase in activity to 2017 and beyond. Considering the number of variables that can influence the energy market in addition to basic supply and demand fundamentals, it is anyone's guess as to activity moving forward. I believe that in Q4 we will see the typical market declines due to the winding down of budgets and the impact of holidays, which reduces the number of billing days in the quarter. These declines are likely to overshadow gains from continued share growth as a result of recent contract awards in the U.S. and Canada, a large electrical project in Norway, sizable shipments to BP in Angola, increased downstream turnaround activity in the U.S., a contract award from Triumph Aerospace, an OEM spare parts shipment to Caspian Drilling, and artificial lift projects in Australia. As well, Energy Transfer recently awarded us a large single source of supply for a multiyear midstream project that will commence in Q1 that will include establishing a dedicated project team and a branch in the Midwest to manage all the smaller OD, non-trunk line-related line pipe, valves, and fittings for their Dapple Project (13:47). This year, we have taken considerable steps to right size the business to match current market conditions, and we will continue doing so as we move forward. At current market levels and outside of one-time costs, based on actions taken to date and those planned in future periods, we believe we can position this business to begin producing positive EBITDA by mid-2016 without hampering our ability to take advantage of an eventual market recovery. This will be achieved through continued cost management and minimizing the balance sheet impacts from the higher than usual levels of bad debt and inventory obsolescence charges that we have experienced this year. The distribution business is one of the earliest cycle plays in the energy industry, and therefore, it is the first to feel the pain in a market contraction, as well as the first to benefit from a recovery. Our strong balance sheet and access to capital give us the ability to make prudent business decisions that will position us to take share in an up cycle instead of making short sighted moves that would negatively impact future periods and our long-term growth strategy. While we have produced strong cash flow from the balance sheet so far this year, we still have work to do in that area and expect to generate considerable cash moving forward as we continue to reduce our working capital as a percentage of revenue and maintain a very low level of CapEx. On the M&A front, we are still working through customary closing conditions with Challenger and expect to close that deal sometime during the quarter. Depending on the timing of the close, it, along with an extra month of Odessa Pumps, could add an additional $10 million to $15 million of revenue in the quarter, depending on what happens in the market. We are fortunate in that we have a strong balance sheet that aids us in weathering this depressed market and in capitalizing on potential opportunities as they arise. Of the nine acquisitions we have completed in the last year, three of them represent more than 85% of the total acquired revenue and are exceeding our original revenue projections and generating high single-digit EBITDA margins. While both the offshore and onshore energy market declines will have some impact on these businesses, their revenues have held up nicely. Considering the fact that we are almost one year into this downturn and forecasts for a recovery continue to be pushed further out, we are refining our M&A strategy to put more focus on the larger targets that are more insulated from drilling and production activity. That's not to say that we will not take advantage of an attractive opportunity for a distributor to the upstream energy sector that would represent a wise investment for our shareholders. We are pleased with how the capital we have allocated so far is performing, and we plan to maintain that track record. Our M&A pipeline is still very healthy, but macro headwinds on both the energy and industrial sectors have both buyers and sellers proceeding cautiously in discussions. I think there is little doubt that the longer this environment persists, the more that opportunities will arise and allow the strong to get stronger. As long as we have a solid balance sheet and ample liquidity, the target companies fit our strategy, are accretive, and are a cultural match, we will continue to do deals, but they need to hit on all of those cylinders. Taking into account that we are willing to take on leverage up to 40% net debt to equity range for deals that fit our criteria and that we are currently in a net cash position, we still have more than $700 million available to allocate towards M&A without taking into account the fact that this amount would grow as we add equity from acquired companies. We will maintain strong discipline around managing our business through the cycle while positioning for the future, continuing to generate cash and reducing working capital as a percent of revenue and looking for opportunities to prudently allocate capital to drive value for shareholders. I'd like to thank everyone for their interest in DistributionNOW and turn the call over to Dan for his review of the financial highlights. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Robert. It's nearly a year-and-a-half since we spun off from NOV, and I continue to be proud of the efforts as we created a world-class provider of products and services to the energy industry. I am thankful for our dedicated, hard-working employees. They are the true assets here at DistributionNOW. The headwinds from this downturn have proven to be more severe than most others, but our seasoned management team continues to respond to the daily challenges. We will continue to concentrate on the needs of our customers, while focusing on producing results for our stakeholders. Robert discussed our business, and I will touch on our financials. NOW, Inc. reported a net loss of $224 million or $2.09 per fully diluted share on a U.S. GAAP basis for the third quarter of 2015 on $753 million in revenues. This compares with a net loss of $19 million or $0.18 per fully diluted share on $750 million of revenue in the second quarter of 2015 and compares with net income of $32 million or $0.30 per fully diluted share on revenue of $1.07 billion for the third quarter of 2014. Included in our Q3 results was $260 million of associated with goodwill impairment and acquisition and severance charges, which I'll cover in more detail. Excluding these other costs, our loss was $18 million or $0.17 per fully diluted share. During the quarter ended September 30, 2015, we recognized a non-cash loss of $255 million, $202 million after-tax, associated with the estimated impairment of goodwill related to our U.S. energy and international reporting units. The impairment charges were primarily the result of the sustained decline in the worldwide oil and gas prices and rig counts, which have adversely impacted not only our current results but our future outlook. In addition, we considered the decline in the market value of our DNOW stock. The third quarter also included $5 million in acquisition-related and severance charges, plus the $260 million in other costs mentioned earlier. Also included in our Q3 results is a $16 million charge or $0.10 per share resulting from high steel content inventory cost adjustments relating to falling steel prices. Gross margin declined $7 million in Q3 to 15.5% compared with 16.5% in the second quarter of 2015, reflecting inventory cost adjustments and continuing price pressure. Excluding the impairment of goodwill, operating profit was down $9 million sequentially. Third quarter EBITDA, excluding other costs, was a loss of $20 million. Looking at operating results for our three geographic segments, revenue in the United States was $497 million in the quarter ended September 30, 2015, essentially the same as the prior quarter, but down 34% from the year-ago quarter. The third quarter decrease is driven by the continued decline in the U.S. rig count, slightly offset by incremental revenue gains from acquisitions. Excluding the impact of acquisitions, U.S. revenues were down 4% sequentially compared with the U.S. rig count decline of 5% in the third quarter of 2015. Third quarter operating profit in the U.S., excluding goodwill impairment, was a loss of $42 million compared with a loss of $23 million for the second quarter of 2015 and a profit of $28 million in Q3 2014, reflecting revenue declines, pricing pressures and inventory charges. In Canada, third quarter revenue increased 6% sequentially to $94 million and down 46% from Q3 2014, reflecting the sharp declines in the Canadian rig count. The Canadian dollar continued to decline relative to the U.S. dollar adversely impacting revenue, falling another 6% since the end of the second quarter and 21% since the third quarter of 2014. Canadian operating profit for the three months ended September 30, 2015 totaled $2 million compared with a loss of $5 million in Q2 2015 and with a profit of $14 million in the year-ago quarter. The decrease in OP relative to Q3 2014 was essentially due to revenue declines, partially offset by expense reductions. International revenue was $162 million in the third quarter, down slightly from Q2 2015 and up $13 million or 9% over Q3 2014, primarily reflecting revenue gains from acquisitions. Excluding acquisitions, international revenues were down slightly as reduced market activity and customer spending impacted revenue opportunities. Excluding goodwill impairment, international operating profit for the third quarter of 2015 was $4 million or 2.5% of revenue, up over Q2 2015, but down $4 million from the year ago quarter as international activity declined. Revenue channels for the third quarter show 76% through our energy branches or stores as many of us know then and 24% through our supply chain locations. Looking at our income statement, warehousing, selling and administrative expenses were essentially unchanged from Q2. These costs include branch and distribution center expenses, as well as corporate costs. It should be remembered that we have reduced our quarterly warehousing, selling and administrative expenses by approximately $45 million in the third quarter of 2015 when compared with the fourth quarter of 2014 or more than 25%. This excludes any cost increases from acquisitions. The effective tax rate for the third quarter of 2015 was 23%. Turning to the balance sheet, NOW, Inc. had working capital of $1.14 billion at September 30, 2015, which was 38% of Q3 annualized sales, 34% when cash is excluded. While improving, we still strive to get to 25% again. Accounts receivable was $564 million at the end of Q3, a reduction of $101 million during the quarter. Year-to-date, we reduced AR approximately $356 million or 42% before the additions from acquisitions. Inventory was $771 million or $121 million lower than at the end of the second quarter. We have slowed the inventory replenishment process and should continue to show reductions this year. Excluding the additional inventory from acquisitions, inventory was down $231 million or 24% this year. Our current days sales outstanding showed improvement in the third quarter to 68 days, and we continue to work on improving these results to closer to the 60-day range. Inventory turns improved to 3.3 times and will return to at least four turn. Cash totaled $126 million at September 30, 2015, up $12 million during the quarter. Approximately 76% of our cash is located outside the U.S. as excess cash in the U.S. is used to repay bank debt. We ended the third quarter with $120 million of bank debt, so we were cash positive. Our borrowing costs approximated 1.7%, and we continue to have plenty of dry powder as we consider growth opportunities for DNOW. Capital expenditures during Q3 were $2 million, giving us $8 million spent through three quarters this year. Our maintenance CapEx normally runs $10 million to $20 million annually, and we will certainly be on the low side of the range this year. Free cash flow for the third quarter was $161 million, up $215 million over the year-ago quarter, and a $70 million improvement over Q2. The fourth 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 and reducing costs. We have confidence in our strategy, in our employees and in our future as we position 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, Corey, let's open it up to questions.

Thank you. [Operating Instruction] And our first question comes from Dave Manthey from Robert W. Baird. David, your line is open. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Thank you, good morning. Robert R. Workman - President, Chief Executive Officer & Director: Good morning. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Good morning. First of all, on average, what percentage of your upstream sales are typically to drilling rigs versus fracking and completion activity? Robert R. Workman - President, Chief Executive Officer & Director: Very little goes to completion and fracking activity. That would be like selling to the companies who have the (29:12) frac spreads. We sell some product to them, but not much at all. The biggest part of our revenue upstream would be to the drilling contractors and to the oil and gas operators when they build tank batteries, and they have maintenance spend to keep their production going on older wells. So, I don't know the exact split out of that, but I would estimate that, in that segment, a quarter of our revenue goes to the drilling contractors and the other three-fourth goes to the operators. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. I guess that is a definitional thing. When I was thinking completion, that's the tank batteries and hookups and that sort of thing? Robert R. Workman - President, Chief Executive Officer & Director: Yes, but that would be to the operator, yes. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Operator, okay. Perfect. And then, second, the lower of cost or market inventory charge appears to have cost you about 200 basis points of GP this quarter. But since that's a reset, I assume this disproportionately impacts the current quarter, and if we see stable pricing from here, I know that's an assumption, but if we were to see stable pricing, should we assume gross margins would be closer to the high-teens than the mid-teens? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. I agree with you, that is a massive if, but in a perfect world if there were no more pricing pressures, some portion of the write-down of those goods would end up back in gross margin. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. All right. Thank you very much.

Our next question comes from Matt Duncan from Stephens. Matt, your line is open.

Hi, good morning guys. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Matt. How're you? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hi, Matt.

Good. Thanks. So Robert, on the gross margin side, I mean I'd say it's pretty good performance you guys are getting there when you back out the charges. You're up 20 basis points sequentially, if I back out the charges in the 2Q and the 3Q, despite all the pricing pressure we're seeing in the market. So what are you guys doing there to maintain those gross margins? Is it a product mix thing, or is there something else that you're doing? Robert R. Workman - President, Chief Executive Officer & Director: No. I would say that the activity around bidding and pricing pressures from customers really came on strong in Q1 where you saw the impact of the margin erosion and it really just kind of kept consistent. So we're really not doing anything different in Q3 that we did in Q2 to make sure that that pricing erosion doesn't deteriorate further. It's not really a product mix thing or anything else. It's just a repeat of the impact we had in Q1.

Okay. So if we had no additional inventory write-downs, which, again, I realize is a big if, given what's going on with steel prices, but if we had no additional write-downs, would gross margin theoretically be flat to up versus the Q3 adjusted level? Robert R. Workman - President, Chief Executive Officer & Director: I think we're in uncharted waters, Matt, because if you had asked me would gross margin deteriorate in Q3, just from a product pricing perspective, I would have said I am highly confident they would deteriorate and they didn't. So I'm getting surprised at how well they're holding up. I surely wouldn't expect them to grow, not in this market, but holding flat, I think, would be a win.

Okay. And then all things taken into account 4Q versus 3Q, it sounds like you're telling us sales are going to be down. Can you put any order of magnitude on that based on what you're seeing right now? Robert R. Workman - President, Chief Executive Officer & Director: Well, I could if the only effect was holidays, but determining what this rig count is going to do, which will be pretty significant, is impossible to forecast. So I would tell you that, if you make your own rig count forecast and use our performance on our revenue per rig, that'll get you somewhere there and then discount it for the holidays.

Okay. And then, last couple of things. Just free cash flow expectation for the year and then, on M&A, it sounds like you're sort of shifting the focus to larger deals outside upstream, if you could give us a little bit of color on the type of stuff you're looking at there that would be helpful? Robert R. Workman - President, Chief Executive Officer & Director: Okay. So we said on the last call that we thought we could get another $250 million to $300 million out of inventory and receivables in the second half of the year, and we surprised ourselves and got over $200 million out in Q3. So, we think we could see another $100 million-ish of value coming out of those two buckets, and what was your second question?

Just M&A. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, we said all along that our M&A strategy includes several components. Some of those components were to increase our participation in the downstream market. As you saw with MTS, it was also around expanding our participation in industrial supply chain market, and so I think you would see more of that. I don't anticipate you're going to see us break out of what we've stated our M&A strategy is all along.

Okay. Thanks.

And our next question comes from Sam Darkatsh from Raymond James. Sam your line is open. Sam J. Darkatsh - Raymond James & Associates, Inc.: Good morning, Robert, Dan, Dave. How are you? Robert R. Workman - President, Chief Executive Officer & Director: Good morning, Sam. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: How are you, Sam? Sam J. Darkatsh - Raymond James & Associates, Inc.: Doing well. Thank you. A couple of quick questions. Robert, your mid-2016 goal for hitting positive EBITDA, can you give a sense of what your rig count assumption is for that expectation? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. It's basically, assuming we're in this same depressed market, if rig count were to decline another 100 rigs, 200 rigs that would be another whole conversation. Because it's a lot easier to remove revenue off the income statement if the market declines than it is to adjust expenses. So we'd be chasing that revenue line downward. Sam J. Darkatsh - Raymond James & Associates, Inc.: So flattish rig count sequentially adjusted for seasonality is how we should look at it? Robert R. Workman - President, Chief Executive Officer & Director: Yes. Sam J. Darkatsh - Raymond James & Associates, Inc.: Okay. And then, I'm not sure if Dan or Dave, the remaining $296 million in goodwill, how much of that ballpark is remaining from deals that closed prior to the end of last year, and how much of that is from the recent deals? Just trying to get a sense of what, if things continue to look in the direction they are now, what might be at risk for further write-downs? Robert R. Workman - President, Chief Executive Officer & Director: Okay. A big chunk of that, more than a third of it is, is Canadian goodwill, which we're not impairing. We're impairing the U.S. energy reporting unit. The remainder is largely international, except for – I'm sorry. U.S. supply chain is another component. But our international unit, we talk about a small impairment in that part of the goodwill, and we're reviewing this each quarter. But most of this is international and U.S. supply chain and Canada, which is not impaired and U.S. supply chain, which is not impaired. So we fully impaired the U.S. Energy group is kind of my point. Sam J. Darkatsh - Raymond James & Associates, Inc.: Very helpful. Thank you folks. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

And our next question comes from Jeff Hammond from KeyBanc Capital Markets. Jeff, your line is open.

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

So on revenue per rig, nice bump the last couple of quarters. Do you attribute that to really share gains or our revenue per rig holding up maybe a little bit better this cycle relative to where you see the drop in downturns? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, there's a component of that that's obviously acquired revenue, which is that $1.4 million number. But the part that's definitely share gains is going from $1.1 million in Q4 on the base business to $1.2 million the last two quarters, because we would definitely anticipate, like we have all always in the past, a reduced revenue per rig as they cannibalize inventories and pull back and cut expenses, and those things of that nature. And the only thing that would replace that are share gains. And we have a long list of those areas where we felt like we have gained that revenue stream to help offset reduced customer spending.

Okay. Great. And then, just on the inventory adjustment in the steel pricing, based on current prices now, do you expect, then, another adjustment into the fourth quarter and what the magnitude might be if things hold from here? Robert R. Workman - President, Chief Executive Officer & Director: The only new data point we have since our last LCM, lower of cost or market steel price related deflation adjustment is the month of October. And it definitely started sliding more toward the seamless side, which has been pretty insulated so far due to the mills having some pretty good discipline around taking production off-line. Based on what we saw happen in that month, if it were to flatten, we may have some adjustments that wouldn't be very significant. If it continues to slide like it has in October for the next two months, we'll definitely have some costing problem.

Okay. Great. And then just back on the acquisitions, what do you think currently is kind of the biggest impediment to getting additional deals done? Robert R. Workman - President, Chief Executive Officer & Director: Well, we don't adjust our willingness – I'm sorry, our model around what we're willing to pay from a multiple perspective. But as we get further into this downturn and realize it has got longer legs than we originally thought, our forecasting is definitely getting reduced. And so that's causing some bid/ask spread issues.

Okay. Thanks guys. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

And our next question comes from Walter Liptak from Seaport Global. Walter, your line is open. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hi, Walter.

Thank you. Robert R. Workman - President, Chief Executive Officer & Director: Good morning, Walt.

Hi, guys. I wanted to ask about in your prepared remarks and commentary about market share gains, you mentioned something about a customer that was won back or something like that. I wonder if we could get some more color on it. Was it U.S. or international? How meaningful is this, or was that just sort of an anecdotal thing? Robert R. Workman - President, Chief Executive Officer & Director: Are you talking about the comment I made about the U.S. supply chain customer where we implemented in several of the core areas?

Yes, that's right. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So that'll be mostly share gain. That's not currently our customer. They use some of our competitors, and it's another model where we're taking over all the management of their supply chain on their field. So that will take a while to implement because it's a pretty large implementation. They'll become at the end of this implementation one of our largest customers. So you'll see that materialize in our U.S. supply chain business over the many, many quarters.

Okay. And how impactful was that on the revenue per rig? I mean, was that something where you could point to it and say, we have got to continue on this managing supply chain, we're gaining market share? I mean is this part of the strategy? Robert R. Workman - President, Chief Executive Officer & Director: Well, it's definitely part of our strategy, but that particular customer had almost no impact on revenue per rig because we're just in the early, early stages of implementation. So it would get lost in rounding if I divided the revenue we got from them by the rig count.

Okay. Got it. All right. Then I wanted to ask, too, about your comment on bad debt charge-offs. I wonder if you can quantify for us how much are you writing off. It didn't sound like the DSOs was particularly bad in the quarter, but what kind of condition are your receivables? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Well, what we're seeing is our DSOs are getting better. Our processes for handling new transactions is much improved, but our bad debts have increased this year to abnormally high levels due to some of the spin-related activity from last year. We changed all our legal entities, implemented a new ERP system, and now we are here a year later and our customers are working to conserve their cash, and we're kind of working through that. But our bad debt charges this year or accruals for them have amounted to $21 million, and that's abnormally high. We think we've fixed the problems going forward, post-ERP implementation, so we think those numbers will come down. But those are abnormally high, and we'll revert back to our lower traditional small accrual numbers like we experienced in the past.

Okay. Got it. All right, thank you. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thank you.

Our next question comes from Sean Meakim from JPMorgan. Sean, your line is open. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Sean.

Good morning gentlemen. Hey, how are you? Robert R. Workman - President, Chief Executive Officer & Director: Good.

So you noted – you talked a little bit about the impact of steel pricing. Could you give us a little bit more on pricing trends for some of the different product lines, like valves, for example? I'm just curious if you're seeing any difference in terms of pricing pressure between some of the different end markets? Robert R. Workman - President, Chief Executive Officer & Director: No. The end markets really aren't – well, let me take that back. Downstream industrial and some other areas that are insulated from upstream activity aren't feeling nearly the pricing pressures that we do, obviously, in our drilling contractors and operator business. That's where all the pressure is being felt, and it's not really product line specific. It's more project related. So, we can make great margins on line pipe and great margins on valves by supporting the day-to-day needs of our customers. But when they have a project and they bid it out, that's when all product lines are affected on margin. So it's more specific to large projects and not specific to a product line.

Right. That makes sense. And then just, I was thinking about the balance sheet. If we take another leg down in activity, to a degree that would prevent you from getting back to breakeven at the EBITDA line, say, through 2016, at some point, does any of that have any impact on your borrowing capacity to fund deals, or do you think that that $700 million would still hold? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Well, our credit facility is not a borrowing base facility. So we will have the ability to continue to borrow. We have borrowed some now $120 million at the end of the quarter. Challenger, whenever that happens, could cause us to borrow, but we're also generating cash to offset that to keep it down. But it'll have no impact on our borrowing capacity since we're not under a borrowing base.

Okay. Fair enough. Thank you. I appreciate that. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

Our next question comes from Chuck Minervino from Susquehanna. Chuck, your line is open. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Chuck. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hi, Chuck.

Hi, how are you guys doing? Good morning. Robert R. Workman - President, Chief Executive Officer & Director: Good morning.

Just wanted to ask you how you're thinking about this business from an incremental margin perspective when the cycle does start turning and the rig count does start turning positive and you start seeing that sequential revenue growth. Whether that's mid-2016 or 2017, when you kind of factor in some of the costs that you guys have taken out of the business, can you talk a little bit about that? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, when we're in a market where revenue fluctuates only slightly, so we're not in a massive downturn or upturn, we generally have a 10% flow through both negative and positive to the bottom line. However, in this case, with us chasing a rapidly declining revenue stream, it's more in the 15% to 20% range. We would fully expect that to be the same incrementals we had if it's a rapidly increasing market.

Got it. And is there any difference here? Can you contrast the different geographic segments? Is there anything to think about there, U.S., international, Canada? Robert R. Workman - President, Chief Executive Officer & Director: No. I would expect – again, there's two different kind of flow-throughs depending on how significant the revenue change is. But based on your question, if it comes back strong, I would expect in Canada and international and our US Energy segment to have that 15% to 20% incremental range. If it's a muted, really slow improvement, it'll be more toward 10% to 15%.

Got it. And, that number also, is that kind of assuming a kind of flat pricing environment, or is that kind of – you're thinking about it as you'll probably get some pricing in that environment as well? Robert R. Workman - President, Chief Executive Officer & Director: It includes some pricing because one of the reasons why in a severe downturn that our decrementals are high in the 15% to 20% range is because of pricing deterioration. In a really strong recovery, expense management, as well as pricing appreciation is what would generate the 15% to 20% incrementals.

Got it. All right. Thank you guys. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

We have no further questions at this time. I will now turn the call back over to Robert Workman, President and CEO, for closing remarks. Robert R. Workman - President, Chief Executive Officer & Director: Thanks, everyone, for your interest in DistributionNOW, and we look forward to talking to you about our fourth quarter 2015 results. Thank you.

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