Welcome to the Fourth Quarter and Full Year 2015 Earnings Conference Call. My name is Paulette, 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, Dan Molinaro. Mr. Molinaro, you may begin. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thank you, Paulette, and welcome, everyone to the NOW, Inc. fourth quarter and year end 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 Pump & Equipment, among others. Before we begin this discussion on NOW, Inc.'s financial results for the fourth quarter and yearend December 31, 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…

Thank you. And our first question comes from David Manthey from Robert W. Baird. Please go ahead. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Dave. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Good morning. Robert, I believe you mentioned the warehousing and SG&A expense run rate in the fourth quarter 2015 relative to the fourth quarter 2014. What was the – ex acquisitions, what was that decline? Robert R. Workman - President, Chief Executive Officer & Director: It was $196 million of SG&A reduction less acquisitions on a run rate basis. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And along with that, I'm trying to understand the footprint here. I know with the IPO you were about 330 locations. You've had a number of acquisitions, today you say about 300. What will that look like over the next few years and in the past Robert, you've mentioned that if you didn't think things were going to get materially better over the next several years, you might redesign the business. Are we there yet? What might that look like and where will we just continue to see these incremental steps between here and there? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. I don't think anyone out there for at least the people that we follow are forecasting a three year and four year and five year downturn in the U.S. land play. So we're not there yet in the complete redesign of the business, but we'll continue making these expense cuts based on what's going on with drilling activity. Now, as you know, all bets are off, no one ever gets the oil price rig count forecast right. But if we do come to conclusion that this is 2018 event, 2019 event than we'll have to take another look at how we design our supply chain network for our customers. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And then finally, is there any reason to believe that DNOW's revenues per rig would change in the near future versus the ranges you've seen in the past? And I guess you've been historically thinking about 15% to 20% incremental margins, if things were to turn up here, any change in either of those metrics as you can see? Robert R. Workman - President, Chief Executive Officer & Director: I don't see any, but I will repeat what I've told you before as well. I'm surprised that it's holding up like it is considering the amount of DUCs, or the drilled uncompleted wells and the amount of destocking that's going on. I fully would have told you a year ago that revenue per rig would be in the $800,000 range, not $1 million less acquisitions. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Right. Okay. Great. Thank you very much.

And our next question comes from Matt Duncan from Stephens. Please go ahead.

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

So, Robert I want to start by just trying to look forward a little bit here. I mean, since the end of the year, U.S. land rig count is down 27%, 28%. How are you thinking about first quarter revenues relative to 4Q given how rapidly rig count has been declining so far this year? Robert R. Workman - President, Chief Executive Officer & Director: Well, I think, we've got many, many data points that we provided out there around our revenue per rig. So, depending on what you think rig count is going to do for the rest of the quarter, I think that mass is pretty easy to accomplish.

Okay. So, the Updike acquisition then must be relatively small in terms of revenue contribution? Robert R. Workman - President, Chief Executive Officer & Director: Yes. It was a very small bolt on.

Okay. Next thing is on gross margin. If I look at it sort of adjusted backing out the inventory adjustments, I think it was 17.7% in the third quarter, 17.2% in the fourth quarter. So down a little bit which would be expected with the sequential revenue decline. Is that a level that you think you can hold give or take depending on what happens with the top line? You talked a little bit about some of the price pressure you're seeing in pipe. Are you seeing that other places, or is this a gross margin level you guys can somewhat maintain depending on what happens with the top line? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, we had a, what I would call, a price pressure event in Q1 of last year which cost us about $11 million of base margin at the time. So far, Q2, Q3 and Q4, that's kind of held flat. So we haven't had any erosion in gross margin that's – as a result of base margin changes. So depending on how we manage all the other buckets that go into the gross margin line, I think that staying where we are generally is probably a reasonable expectation.

Okay. And then given the cost actions you guys built in the fourth quarter and it sounds like you've taken a little bit more of a head count reduction here in the first quarter. How is that going to change that quarterly SG&A expense run rate, Dave or Dan? Robert R. Workman - President, Chief Executive Officer & Director: Well, I'll answer, Matt. I mean, we've reduced expenses by about $3 million less M&A in Q4 versus Q3. I think we would get something similar, if not a little better, in Q1.

Okay.

Yeah. Matt, this is Dave. I think the result of the reductions we've made this month would approximate $11 million to $12 million a year. And, of course, we're still resizing all of our businesses. So that number will increase. But going forward, we expect similar down – decrease in expenses are greater.

Okay. So obviously, you get that $11 million or $12 million annualized, plus if revenues are down, you're going to get some decrease in variable comp as well. So it's going to decline probably a little more than $3 million. All right.

That's right.

And then last thing for me, just on the cash flow side, you guys obviously did a very good job taking working capital out in 2015. It sounds like you do think you've got more to do there. What is a reasonable assumption on how much more you can squeeze out here in 2016 as you think about free cash flow for this year? What should we assume maybe relative to what you did last year? What kind of free cash flow potential do you guys see this year? Robert R. Workman - President, Chief Executive Officer & Director: We still think, Matt, that we can get the 25% of working capital as a percent of revenue. So we're at 35% right now, if you exclude cash. So that still leaves 10% of revenue on the balance sheet that we're aiming to remove. The percentage doesn't move much when revenue keeps dropping because that's a major component in the calculation. But at some point, when revenues stabilize, we expect to be able to reach 25%. So whatever you're assuming our revenues would be, there is your 10% of that would be the cash we're targeting.

Okay. All right. Very helpful. Thanks guys.

And our next question comes from Joe Gibney from Capital One. Please go ahead. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hi, Joe.

Thanks. Good morning. Just a quick one really, I was just curious on the offshore percentage of your mix. Are you going to move away from what's happening on upstream in terms of onshore? Just curious on your offshore percentage of mix within your International component, and then maybe holistically as a total company to be useful just kind of benchmarking as we think about 1Q into 2016 from a revenue perspective? Robert R. Workman - President, Chief Executive Officer & Director: And just to make sure, you said our International segment?

Yes, and then maybe holistically for your total company as well. Just curious your offshore drilling percentage of the mix, just try and calibrate a little there, it would be helpful? I appreciate it. Robert R. Workman - President, Chief Executive Officer & Director: Our International segment is our most project-oriented business. So it moves more than you would think. So depending on the number of projects we have with people in Iraq, BP, and companies like that, it could vacillate between a third of our International revenue to some quarters as high as half of our International revenue.

Okay. And then... Robert R. Workman - President, Chief Executive Officer & Director: And on the rest of the business, it's pretty immaterial. I mean, if you put Canada and the U.S. in with International, it's probably high-single digits today as far as total exposure.

Okay. All right. That's helpful. I appreciate it. I'll turn it back.

And our next question comes from Sean Meakim from JPMorgan. Please go ahead. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Sean.

Good morning. So you guys know that there's some larger targets out there in terms of M&A. I was just hoping could you give us a little sense of geography meaning. Are we thinking about primarily other sizeable targets in North America or does that kind of leave us mostly internationally focused? Just curious, kind of how to think about, where those types of targets could be located, the types of markets that would have (43:31) Robert R. Workman - President, Chief Executive Officer & Director: Of the two I mentioned in my commentary. One is very U.S. centric and one is based outside of the U.S. that has revenue all over the world, but has a little bit of revenue in the U.S.

Okay. That's helpful. And then just thinking about, at this point in the cycle, is there potential for I guess, these – is stock or stock deals – the main way in which transactions are going to get done here or are there – the types of folks that you're interested in, in acquiring, is anyone willing to take cash at this point in the cycle? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So we sell along and it remains to be the case today that we don't want to dilute our shareholders. So, as long as we have available credit, we're sitting at almost net no debt, we'll continue to use cash and we have not had an issue at all in our conversations with target companies in using cash instead of stock.

Okay. That's helpful. And then just one last one on gross margin, just curious, if we're still making progress on the supplier side. You noted that – do you think margins are going to continue to hold in gross margins? How are you expecting the suppliers to help you there? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, as I mentioned earlier, our base margins haven't moved any so – well not say any – they have moved very insignificantly. So we're not having any issue on the pricing side because we'd not be getting pricing pressure but we're working it with our suppliers on the cost of goods sold. So we're working that area and we're also working a component of our gross margin, which is our rebates and those are just down because the volume is down. There's not a whole lot we can do about that.

Got it. Okay, great. Thank you.

And our next question comes from Ryan Cieslak from KeyBanc Capital Markets. Please go ahead. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Ryan. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hey, Ryan.

Hey, guys. Good morning. Robert, I think you mentioned on your prepared remarks, a level of rig count where you think you'd eventually get back to positive EBITDA. Could you just refresh us again what you said there? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So based on the adjustments we've made in the business to-date we believe we can get to a profitable level between 2,100 rigs and 2,200 rigs, which is where we will – with the rig count and the revenue levels we were in Q3 2015 when I made that statement on the last call. But we're going to continue to right size this business assuming 2,100 rigs and 2,200 rigs are in our foresight anytime soon. So that was just a snapshot on where we sit today and what we think would be breakeven EBITDA today. But that will change as we move forward and continue to right size the business.

Okay, got you. And then just a question, maybe another way of asking about the margins going into this year – how should we be thinking about the incremental margins if we were to see similar types of top-line declines in 2016. Is there – and actually going to be maybe some additional support be given and all the cost reduction you guys have taking on or just maybe some color around that would be helpful? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. Our decrementals and – in a recovering market our incrementals would be in the 15% to 20% range until we reach a point where revenue is moving less severe. And then it gets closer to 10%. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: And then detrimentals....

Okay, got you. Robert R. Workman - President, Chief Executive Officer & Director: Yeah, okay.

Okay. And then the last one I had is – thinking about the revenue per rig and obviously it seems like you guys continue to execute on the share gains. Robert, can you talk a little bit about maybe the cadence of what you're seeing with share gains? Are they picking up over the last couple of quarters or do you expect that to pick up here going into 2016? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. In this market, believe it or not, it's easier to go and share in this market than it is a strong market. So we continue to have lots of competitors in all of the major plays in Canada and the U.S. that might have four branches or five branches or six branches that are really struggling that gained customers in a really hot market because customers were only concerned with how fast they could get product, not necessarily what the price of that product was. And in this market, where they are trying to manage their expenses down, they are looking for suppliers that will be here a month or two or three down the road. There's much fewer players out there that can compete. And so, in this down market where that's kind of evidenced by our revenue per global operating rig, not dropping in the $800,000 ranges or $900,000 ranges is the fact that we're growing share. Sometimes it's coming in small contracts, sometimes it's coming in projects, sometimes it's coming in a large contract to middle contract. So it's kind of across the board.

Okay. That's good color. And then the last one just really quick, the pricing trends, you gave some color on the pipe side. Just would be curious to know maybe what you're seeing in some of the different product lines, particularly on the valve side into early 2016? Thanks, guys. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. No problem. Like I said earlier, our product margins or our base margins haven't moved much and it's not really been one product growing, one product declining. It's pretty consistent for the last three quarters. Our margins for our product lines, it's not moved much at all.

And our next question comes from James West from Evercore ISI. Please go ahead. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hi, James. Robert R. Workman - President, Chief Executive Officer & Director: Hi, James.

Hi, good morning, guys. Hey, Robert, how do you think about if you go after one of these larger transactions and you are using primarily cash and I'm thinking obviously there's a big elephant in the room right now. But if you were to do something like that, you'd be taking on a lot of debt as well. How do you think about debt to EBITDA or, I guess, debt to capital, or however you guys think about it? Where are you willing to lever up to to do something big? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, I think we've always said we'd be comfortable with 20% to 40% debt to equity, in that range somewhere. One thing we're keeping mindful, though, is that when a market recovery occurs, we're going to need some cash because our receivables and inventory will chew up quite a bit of cash if we have a strong recovery in the market. So, we're definitely taking that into account when we're looking at our debt loads with respect to how far we're willing to go because we don't want to get in a position where we're not able to fund share growth in a recovery. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: James, we're at 7% debt-to-cap right now, and that gives us an awful lot of room, and get nowhere near Robert's upper threshold of the 40%. So I think when Michelle and Robert are out looking at deals, I say to them, from a financial standpoint, same thing I used to say to Pete Miller at NOV, I'll be there with the checkbook when you guys find the deal, and I think we're in the same position right now.

Okay. And would you be suggesting that even if they did something large that got you towards the upper end of that, you could find additional liquidity at that point to make sure you had cash for the upturn? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Well, I think finding additional liquidity in this market would be difficult. We're a non-investment grade company, and...

Sure. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: ...the capital markets are pretty dry for energy space, although recently there has been some indication it might open up. Someone earlier asked about equity, though, I suppose if we did a real big deal, equity is always a currency we might want to consider later on. During the first two years of our existence, we've been mindful of some NOV issues too with our equity. But if we find a larger deal, we would look at all the options and maybe there'd be some other ways to borrow some more too, but...

Are there still any NOV issues with the equity? Robert R. Workman - President, Chief Executive Officer & Director: Yeah, the... Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Well, there is until the end of the two years, which is the end of May.

End of May, right, okay. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: For the first two years, we have to be careful on how much equity we would throw at a deal, but we've had no equity conversations on any of the deals we've done, not that I'm aware of, Robert. So we've been able to finance them through our balance sheet. And certainly any deal we try to do now, if it was large enough that you needed equity, we wouldn't get it finished before the end of May anyway. So the two-year...

Right. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: ...moratorium will be over anyway.

Got you. Okay, great. Thanks, guys.

And our next question comes from Chuck Minervino from Susquehanna. Please go ahead. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Chuck. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hey, Chuck.

Hey, guys. Good morning. Just along that similar line of questioning, can you kind of talk a little bit about the pros and cons of large-scale M&A kind of at this point in the cycle? I mean I guess you understand when things are going well, and I guess balancing that with having plenty of capacity internally for some level of an upturn when it comes. So can you talk about what you see there from a benefit perspective of doing it at this point in the cycle, if you're still kind of in this cost reduction, maybe closing of facilities mode as rig count continues to drop? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So our philosophy has been the same here as it was when we were at our prior firm. The best time to consolidate is always going to be in a downturn as opposed to when the market's really hot and you're paying 50% to 100% more than you would otherwise. So we see it as an opportunity to make some strategic acquisitions that fit certain holes in our solutions offering or in certain geographies. We think now is the time to do it, especially with our runway of balance sheet room and that's kind of – we're going to continue down that path until such time we feel like that we need to reserve some space on our balance sheet to fund a recovery.

Can you talk a little about where you kind of are from a cost perspective kind of set up for the upcoming year? Are you kind of, from a cost basis, set up for a certain level of rig count, whether it be 500 or 600? Are you still kind of managing that as rig count falls further? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So global rig count was, what, 3,500, 3,800 or something of that nature about a year ago, and now we're at 1,900. So we've adjusted our cost. At this point, where we feel like we could break even in the 2,100, 2,200 range, which is a huge cut in our expenses and we're going to continue adjusting as the rig count dictates. It's impossible to cut expenses at the same rate the rig count declines. So hitting a bottom and letting revenue flatten out would be a positive step towards making the right amount of adjustments so that we're producing positive EBITDA.

I guess kind of along those similar lines, I mean do you feel – I guess it doesn't sound like your M&A strategy has really changed very much. So there's no kind of need to see a trough in rig count or even just some stabilization here before maybe moving further along on some deals? Robert R. Workman - President, Chief Executive Officer & Director: No, not at this point because we still have so much room left in our balance sheet capacity. And these firms that we're acquiring, whether it's Odessa Pumps or Challenger or MTS or MacLean, those four probably make up 80-plus-% of the acquired revenue so far, are all producing EBITDA that's accretive to where we are, and I don't mean because they lose less, they're making single-digit EBITDA in a horrible market. And so those kinds of investments will always make sense whether in this market or not.

Okay. Thank you.

And our next question comes from Walter Liptak from Seaport Global. Please go ahead. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Walt. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hey, Walt.

Hi. Thanks. Good morning, guys. I wanted to ask a follow-on to the M&A question, and just asking about valuation and how you guys are approaching valuation in this market. Are you looking at it like a normalized EBITDA or is it price-to-sales? What metrics are you using? Robert R. Workman - President, Chief Executive Officer & Director: Before the downturn, we typically look at trailing 12, and we're not looking at that right now. So we're going through it and getting a seller's forecast, and then we're doing our own forecast to see how rosy they're trying to paint a picture. And then once we get comfortable that we can tell how this business looks going forward, we use that model to value the business. And as you can imagine, that creates a lower success rate at us closing these deals. But at the end of the day, it is what it is. I mean, this market's going to be here for an undetermined period of time, and so we're taking a reasonable look at their business or other businesses moving forward as opposed to how they performed in the past.

Okay. Okay, great. And I wanted to ask on the working capital accounts, it's good work on the receivables. But in your commentary, I think you alluded to bankruptcies and maybe some bad debts and trying to improve the DSO. Wonder if you can just give us some color on how bad is it. How much – or did you take any charge-offs for bad debts? Are there some that are at risk as we go forward?

Yeah. This is Dave. Obviously, we're seeing more bankruptcies among our customer base, and we've taken charges going to $2.5 million in the quarter just for bankruptcies and that doesn't include general bad debt issues we're having as well, which amounted to over $5 million for the quarter. So collections and bad debt issues is an issue. We believe by reducing our DSO, which we've made nice progress on, we can mitigate that somewhat, but now we're in an environment where our customers are having some obvious difficulties.

Okay. And I guess as you're going after market share, credit quality obviously becomes an issue, and I guess with the market share wins that you kind of highlighted, I assume that the terms are normal. I wonder if you can comment on that. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. We're definitely not making any special terms. Our terms have not changed since the market was hot, and Dan could show you a sheet that he keeps with him and his treasurer as credit group if you want it, but we keep a close eye on everyone that's having covenant issues, are slow paying us or are – other people in the industry are having cash problems. So we keep a close eye on all of our customers well before they get to bankruptcy in trying to forecast who may get in trouble.

Okay. Okay, great. Thank you. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Walt.

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: I'd like to thank everyone for their interest in DistributionNOW and we look forward to talking to you about our first quarter 2016 results. Thanks.

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