Operator
Operator
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 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. As of this morning, the Investor Relations Section of our website contains a supplemental presentation relative to our results and key takeaways, which can assist you in understanding our results. 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 2015 Form 10-K 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 Q4 2015 earnings call. As I'm sure everyone on the call is aware, this particular downturn, which will be about the fifth of my career and eighth of my lock time that I can recall, makes others pale in comparison both in severity and longevity. Growing up as a competitive tennis player I'm a big believer in practice makes perfect. However, I feel as though we've had enough downturn practice and while I'm naïve enough to believe this, would welcome a speedy recovery. We are fortunate to have our amazing group of employees in the DNOW family. I'd like to thank each of them for their loyalty, hard work, and continued success in generating considerable cash in a market contraction. I'd also like to take a moment to recognize Doug Bukowski in Calgary who will soon celebrate his 45th year with DNOW. Doug started with Mid-Continent Supply in Weyburn, Saskatchewan in 1971. Through CE Franklin's acquisition of Mid-Continent Supply, Doug became part of the DistributionNOW family in 2012, after we acquired CE Franklin, and currently provides artificial lift solutions to customers. I'd like to thank Doug for his many decades of committed service and in helping to make DNOW the premiere supply chain provider to the energy industry. Moving on to the state of the business, today, we reported a net loss for the fourth quarter of 2015 of $249 million, which includes pre-tax charges of a $138 million for non-cash goodwill impairments, $3 million for severance and acquisition costs, $5 million for high steel content, inventory cost adjustments related to falling steel prices, and an after-tax charge of a $129 million related to a deferred tax asset valuation allowance. Excluding other costs and the impact of steel price deflation, earnings per share for the quarter would be a loss of $0.23. The business generated cash flow from operations of $80 million in the quarter, which brought the cash flow from operations for 2015 to $324 million. The non-cash goodwill impairment charge for the fourth quarter included the remainder of our U.S. goodwill not impaired in the third quarter. Revenue for the quarter was $644 million, which is $1.3 million for global operating rig or $1 million after removing revenue from acquisitions. Due to the strengthening dollar, revenues were negatively affected by approximately $20 million in the quarter and by approximately $80 million for the full year 2015. Revenue for global operating rig in Q4 2015, less acquisitions, was slightly lower than the $1.1 million produced during the same quarter in 2014 but is still higher than what was produced in the industry downturn of 2009. We expected, as cannibalization of parts still pervades the industry, that this downward movement in revenue per rig would have come earlier in the down cycle but we attribute our revenue resilience today to market share gains against the backdrop of a bleak energy environment. Negatively impacting revenue was a reduction in billing days of about 5%, the normal holiday drag on activity and a growing inventory of drilled but uncompleted wells in North America as well as continued destocking as rig counts and E&P activity maintained a persistent decline globally. Until we reach the bottom of drilling activity, we will continue to face headwinds created by idling equipment with inventories that are redirected to other operating areas. Also, until operators complete all of the wells they drill, we will still experience a lack of pipe, valves and fittings orders that normally accompany the construction of production facilities or tank batteries, as we call them. As we've discussed previously, our business is impacted almost immediately when the market moves, with over 80% of our revenues tied to the upstream and midstream markets. In a recovery, revenue and margins improve almost immediately, while expense and balance sheet increases lag top-line growth. Achieving expense and balance sheet reductions consistent with revenue declines in this environment, as a distributor as opposed to manufacturer with a backlog, is like trying to catch a falling knife. As any management team knows, we don't want to cut to the bones and we've tried hard not to so that we can continue to service our customers and gain share from those who are not making the same choices. Unfortunately, because of this unrelenting market, we have already made many significant cuts. At the end of 2015 and since the end of 2014, we reduced non-acquisition head count by about 1,200 or 23% and have closed or consolidated approximately 46 branches. In addition to these expense reductions, we have added nearly 900 employees in approximately 42 locations through acquisitions in 2015. Additional head count reductions, across the entire business, including within acquired companies of approximately 200 has been completed so far in 2016. We will continue these right-sizing efforts in earnest, as evidenced by the $196 million annualized run rate reduction of non-acquisition fourth quarter 2015 expenses we have eliminated compared to fourth quarter 2014. Outside of non-cash expenses, we believe we can reach positive EBITDA levels at Q3 2015 revenues of around $750 million or global rig counts between 2,100 and 2,200, which currently stands at about 1,900. As to when activity reaches these levels, it's difficult to predict. Forecasters and analysts are predicting oil prices to average somewhere between $20 to $65 by the second half of 2016. That's a very wide range and includes rigs to ridges scenarios. Obviously, rig counts will be drastically different later this year, depending on which firm's model proves to be most accurate and we'll continue to adjust accordingly. We'll maintain our focus on managing the business for the short-term, as we move into unchartered waters for rig count in the U.S. is already down 32% currently when compared to the fourth quarter average and Canada was at its lowest fourth quarter levels since the last century. We will balance this with preparing for the long term, ensuring that when the market eventually recovers, we are lean and mean, and positioned to leverage our strong balance sheet to seize it. Regarding our most vulnerable asset, which is inventory, steel process for imported welded pipe continue to fall with mills trying to capture volume due to the lack of OCTG and line pipe orders. Where we were seeing deflation primarily for welded line pipe, we are now seeing deflation in our seamless line pipe products, as both the domestic and import mills struggle with extremely low order volume. Many manufacturers saw a volume fall-off of 50% to 90% in 2015, with the pipe mills hit the hardest. Many are still working to dispose of high-cost raw materials that accumulated due to the energy sector slowdown. As well, there were numerous pipe distributors buying new raw material for inventory in late 2014 and early 2015 that arrived in Q3 2015, exacerbating an already over-supplied situation. A slowdown in China's economic growth, coupled with increasing steel production levels, is pushing commodity prices lower as steel and metal input costs continue downward. More dumping suits are being filed in an effort to shore up prices in respective markets. In the fourth quarter, we saw raw material prices for scrap, hot-rolled coil, and most commodities drop further. The steel price drop has moderated some in the U.S. for now, due to the filing of dumping suits and closures of steel capacity. As this downturn continues, we expect to see more closures, possible bankruptcies, consolidations and dumping suits. Pricing for seamless pipe is now back down to the 2004 levels, and welded pipe back down to the 2003 levels. The lack of volume with manufacturers leads to unpredictability and as steel inputs continue down, we will continue to see inventory cost and price pressures. We will minimize our line pipe inventory risk, both for welded and seamless, having already reduced pipe inventory values by $90 million during 2015. Diving deeper into the quarter, sequential revenue in the U.S. declined by 13%, in line with rig count. A full quarter of Odessa Pumps and partial quarters of Updike and Challenger added about $17 million of incremental revenue in the quarter to both our energy branch and supply chain units. Strong declines with land rig contractors both for MRO and OEM goods across the U.S. and for electrical products related to new drilling machinery and canceled new rig builds were partially offset by share gains with about a half dozen operators in the Eagle Ford and Bakken shale plays. Additionally, our new centralized midstream projects team delivered just over $6 million of new line pipe, valves, fittings and meter run orders for Energy Transfer and Howard Energy in South Texas and for ONEOK in the Rockies. This helped soften the impact from large line pipe projects that were either delayed, put on hold or canceled altogether. For operators that we service through our supply chain group, even though these are some of our largest and most committed relationships, they aren't immune to the commodity price tumble. Large partners such as OXY, Devon and Chevron Gulf of Mexico have curtailed activity and delayed or postponed projects. We're combating these activity-related declines by expanding product lines we provide to these customers, including recently acquired product channels from the Odessa Pumps acquisition. As for the balance of our supply chain team, the anticipated impact of holidays and fewer billing days produced revenue declines for our downstream, industrial and manufacturer customers. With the weakness in the manufacturing sector, many of our customers encouraged employee time-off during the quarter, further exaggerating the decline. In Canada, revenue declined sequentially by 16%, while rig counts were down by 9%, and wells spud declined by 26%, all during a timeframe when the Canadian market's seasonality would normally produce increased activity. Project delays and/or shutdowns with major customers, such as CNRL and Progress were responsible for the largest revenue declines. As well, while certain fields that have proved more resilient during the commodity price rout, such as the Montney and Duvernay, continue to be bright spots, others such as the Cardium, Alberta, Viking and Oil Sands are plummeting. Internationally, increased seasonal activity in the former Soviet Union wasn't nearly large enough to offset lower artificial lift sales in Australia and Indonesia; continued project delays awaiting dispute resolution of the joint operations in the Saudi-Kuwait neutral zone; further stacking of the offshore drilling fleet, affording high levels of inventory available for our customers to redistribute to their own operating floating rigs, which negatively impacts a large share of our International revenue; large valve project declines in most areas outside of the former Soviet Union and Iraq; and across-the-board decline in exports with operators and drilling contractors in all areas of the world except for Europe, where we had a large fourth quarter project; shipment delays at Wheatstone and the completion of the Gladstone LNG project in Australia; and Petrobras cancelling rig contracts or putting them on standby in Brazil. Looking at market activity moving forward, there's no doubt that we still have some very tough quarters ahead. Continued rig count declines combined with an impending Q2 2016 break-up in Canada will make for a challenging first half of 2016 and possibly beyond. In the U.S. energy unit, while there are several exciting organic share wins combined with gains from integrating recent acquisitions into our extensive branch and customer network, it will be hard to soften the impact we'll experience from continued deep cuts in operator budgets and the resulting rig count declines. Some of the bright spots include the fact that our DAPL contract with Energy Transfer has started. We opened a dedicated facility in Hamel, Illinois, for the project and product shipments have already begun with orders extending into March. We expect our recent success in the midstream market, including new meter-run skids and high-pressure actuated valves, will continue to be strong. We have recently received several orders for these two product lines. While our largest operator supply chain customers will likely continue to reduce activity along with other E&P companies, we have reached agreements with two of them to build dedicated supply chain facilities on their properties in the Rockies and the Permian shale plays. We also just signed a new supply chain services contract with a very large operator, who currently has a presence in many of the large and very active plays domestically. This deal was just inked last week, so I cannot release the company's name as their current winner base has not been fully informed. I hope to share further details on this implementation in our next call. Both of these developments will help offset some of the market-driven revenue declines for operator supply chain customers during the second half of the year. Also within supply chain, we expect to experience modest growth due to increased turnarounds with our downstream customers, new industrial contract wins with Dow and National Grid, and the implementation of our recent manufacturing supply chain contract with Triumph Aerospace. We are hoping to see stabilization with the uncertainties of the general economy to lead to reversals of the current shrinking of the manufacturing market. In Canada, several recent contract awards with ARC Resources, Encana, Cenovus, Suncor, Husky and Spectra could produce modest organic share gains against further deteriorating E&P budgets. As well in Canada, adoption of our on-site solutions is beginning to gain attraction and is expected to produce share gains throughout the second half of 2016. Outside of Canada, we expect projects at Wheatstone that were pushed from Q4 2015, as well as increased shipments to BP in Iraq and OXY in Oman, to somewhat hedge continued declines with offshore customers in the North Sea, Latin America, Asia and with our export groups. Moving to the balance sheet, we continue to generate operating cash flow, as evidenced by the fact that we moved from a net cash position of $6 million to a mere net debt position of $18 million sequentially, even after closing two acquisitions in the quarter. Sequentially, we were able to reduce receivables and inventory by $79 million and $78 million, respectively, yet our working capital as a percent of revenue remained relatively flat at around 38%, or 35% when excluding cash on hand, due to continued revenue declines. For these balance sheet accounts, 2015 proved exceptionally challenging, as bad debt and inventory expenses increased by $69 million year-over-year. Understanding that our goal is to achieve working capital at 25% of revenue, that still leaves room for continued cash generation in the coming quarters in this current depressed market environment. We recently filed an 8-K relative to an amendment of our credit facility. This was to resolve a technical covenant issue, and Dan will provide more color in his comments. In this business environment, we are pleased to continue to have a $750 million committed credit facility through April 2019. Capital expenditures grew modestly to $3 million in the quarter, marking the completion of our new, larger distribution center in Dubai. Moving forward, we expect maintenance CapEx to run around $10 million annually. Turning to corporate development, in Q4 2015, we closed two deals, one of which you are aware of, Challenger, the Northern Rockies (20:18) supplier. Challenger just won an approximate $10 million project for urea fertilizer plant with Dakota Gas that will be completed throughout 2016. The second deal in Q4 was an Ohio supply chain bolt-on to MTS, the supply chain solutions business we acquired in early 2015. This bolt-on will continue to help us build out our national presence, serving the industrial manufacturing end markets. We continue to be pleased with the acquired high value-add product lines' performance as their margins have held up nicely in the phase of the surrounding and favorable markets. M&A will continue to be part of our strategic growth plan. As I said on the Q3 call, we are fortunate to have a strong balance sheet, which aids us in weathering this market and in capitalizing on potential opportunities. Taking into account that we are willing to use our credit line to finance acquisitions, fitting our criteria and the fact that we currently only have $18 million of net debt, we still have a large runway of available credit and more cash to be generated from the balance sheet to allocate towards M&A. That said, the bid-ask spread between buyers and sellers could widen in this uncertain market. Right now, we are seeing a broad spectrum of sellers from those who would rather wait for an upturn than sell and risk selling below what they value their businesses to be worth to sellers who are fire-selling to avoid declaring bankruptcy. In between, we are still seeing a few usually product line focused sellers, who are somewhat insulated to the energy markets, are still profitable and are amenable to a sale. In relation to that, for 2016, we're working on a couple larger higher value-add product line transactions and should they move forward, would require regulatory approval. Even if those deals are done, we will continue to be fiscally conservative and refine our models in processes to evaluate and plan for any potential exposure to risk, thus deals may take a little longer to close. Our focus remains on growing organic market share, decreasing expenses, reducing risk on the balance sheet, generating cash from operations and positioning DNOW to take advantage of an eventual market recovery. I'd like to thank all of our shareholders, employees and analysts on the call that continue to support DNOW through these challenging times. And we'll turn the call over to Dan to review the financials. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Robert. Well, it's been almost 21 months since we spun off from NOV, and I continue to be proud of the efforts of our wonderful workforce, as we created a world-class provider of products and solutions to energy and industrial markets. I am thankful for our dedicated hard working employees. They are the true assets here at DistributionNOW. I just wish we were enjoying the better market, but our seasoned management team continues to respond to the challenging business environment. We will continue to concentrate on the needs of our customers while focusing on producing long-term value for our stakeholders. Robert discussed our business and I'll touch more on our financials. NOW, Inc. reported a net loss of $249 million or $2.33 per fully diluted share on a U.S. GAAP basis for the fourth quarter of 2015, on $644 million in revenue. This compares with the net loss of $224 million or $2.09 per fully diluted share on $753 million of revenue in the third quarter of 2015. And both quarters included goodwill impairment and other costs. While looking at the year-ago quarter, we had net income of $16 million or $0.14 per fully diluted share on revenue of $1.0 billion for the fourth quarter of 2014. Of course, this downturn was just beginning back then. Other cost for the fourth quarter of 2015 primarily included a pre-tax impairment charge of $138 million associated with the fair value of goodwill and an after-tax $129 million tax valuation allowance. The fourth quarter also included $3 million in pre-tax acquisition related and severance charges, which totaled $20 million for the full year 2015. Excluding these and other costs, our loss was $27 million, or $0.25 per fully diluted share in Q4. Also included in the fourth quarter ended December 31, 2015 results, but not characterized as other costs was a pre-tax charge of $5 million, approximating $0.02 per share for high steel content inventory cost adjustments relating to falling steel prices. For the year, we've incurred $28 million of these inventory write-downs. During the quarter ended December 31, 2015, we recognized a pre-tax non-cash loss of $138 million associated with the impairment of goodwill for the remainder of our U.S segment that we didn't impair in Q3 2015. The impairment charge was predominantly the result of the sustained decline in worldwide oil and gas prices and rig counts, which have adversely impacted, not only our current results, but our future outlook. Including the $255 million impairment taken in the third quarter, we recognized $393 million impairment for the year ended December 31, 2015. Our remaining goodwill of $205 million resides in our Canada and International units with $88 million and $117 million respectively. Gross margin was 16.5% in Q4 compared with 15.5% in the third quarter of 2015, reflecting reduced inventory cost adjustments and continuing price pressure. Excluding the impairment of goodwill, operating profit was down $10 million sequentially. Fourth quarter EBITDA excluding other costs was a loss of $32 million. Looking at our operating results for our three geographic segments, revenue in the United States was $433 million in the quarter ended December 31, 2015, down 13% from Q3, which was similar to the decline in the U.S. rig count. Q4 revenue in the U.S. was down 36% from the year ago quarter and strengthened by 2015 acquisitions, the revenue decline was less in the fall in the U.S. rig count. Fourth quarter operating profit in the U.S., excluding goodwill impairment, was a loss of $45 million compared with $42 million loss in the third quarter 2015, also after goodwill impairment, and a profit of $3 million in Q4 2014, reflecting revenue declines and deflationary pressures at these lower volumes. In Canada, fourth quarter revenue decreased 16% sequentially to $79 million and down 46% from Q4 2014, reflecting the sharp declines in the Canadian rig count. The Canadian dollar continue to decline relative to the U.S. dollar, which adversely impacts revenue, falling more than 2% in the fourth quarter and 14% for the full year. For the three months ended December 31, 2015, Canada's operating loss was $1 million compared to a $2 million operating profit in Q3 and operating profit of $15 million in the year ago quarter. The decrease in OP relative to Q4 2014 was essentially due to revenue declines, partially offset by expense reductions. International operations generated fourth quarter revenue of $132 million, which was down 19% from the third quarter of 2015 and down 10% from the year ago quarter. Additional revenue provided by acquisitions was offset by decreased International rig activity, where we have a heavier customer concentration of offshore drilling contractors. International operating profit for the fourth quarter 2015 was $3 million, up $2 million over Q3 2015, but down $5 million from the year ago quarter as International activity declined. Revenue channels for the fourth quarter shows 75% through our energy branches or stores as many of us know them, and 25% through our supply chain locations. Looking at our income statement, warehousing, selling and administrative expenses were down slightly from Q3. These costs include branch and distribution center expenses, as well as corporate costs. It should be remembered that excluding acquisition-related expense, we have reduced our quarterly warehouse, selling and administrative expenses by more than 25%. The effective tax rate for 2015 was 3%. Based upon the significant level of recent losses in the U.S. driven by goodwill impairment, we recorded a deferred tax asset valuation allowance in the fourth quarter of 2015 totaling $129 million after-tax. Valuation allowances are recorded per U.S. GAAP when our deferred tax assets may not be realized in future periods, therefore may not reduce our provision for income taxes. As we return to profitability, we would be able to adjust the valuation allowance, thus reducing income tax expense in the future. Turning to the balance sheet, NOW, Inc. had working capital of $1.0 billion at December 31, 2015, which was 38% of Q4 annualized sales, 35% when cash is excluded. We still strive to get to 25% again. Accounts receivable was $485 million at year end, a reduction of $75 million during the fourth quarter. For the year, we reduced AR approximately $434 million or 51% before the additions from acquisitions. We continue to be diligent as bankruptcies are on the rise in our energy space. Inventory was $693 million at year-end, or $78 million lower than the end of the third quarter. We have slowed the inventory replenishment process and should continue to show reductions. Excluding the additional inventory from acquisitions, inventory was down $329 million or 35% in 2015. Our current days sales outstanding were 69 days, and we continue to work on improving these results to closer to the 60-day range. Inventory turns were at 3.1 times. Cash totaled $90 million at December 31, 2015, down $36 million during the quarter. Approximately two-thirds of our cash is located outside the U.S. We ended the year with $108 million borrowed on our credit facility, a net reduction of $12 million during the fourth quarter, a quarter in which we completed two acquisitions totaling $118 million. We recently amended our $750 million revolving credit facility. We added a minimum asset coverage ratio which requires our eligible assets to be 1.5 times our debt. We also reduced the maximum capitalization ratio from 50% to 45%. We were only 7% at year end 2015. In addition, our borrowing cost increased 75 basis points but remain a very attractive rate, and our commitment fee increased 5 basis points. In connection with the amendment, we also provide a security interest in essentially all U.S. assets and an approximately 65% of the equity interest in our first tier subsidiary. The total commitments remain at $750 million, but until we comfortably return to profitability, we can borrow up to 75% of this, assuming eligible assets are sufficient. In the current business climate, this borrowing availability is certainly sufficient. The credit agreement continues to include the $250 million accordion feature and the April 2019 maturity remains. Capital expenditures during Q4 were $3 million, giving us $11 million spent in 2015. This included $5 million to complete a new distribution center in Dubai, so our maintenance CapEx was $5 million to $6 million in 2015. Free cash flow for the fourth quarter was $77 million and $313 million for the year. We entered 2016 with the worldwide market continuing in decline. While we look forward to better times, we will continue to focus on serving our customers. We will continue integrating our recent acquisitions and managing 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, Paulette, let's open it up to questions.