Dnow Inc. (DNOW) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2016 Earnings Conference Call. My name is Christine, and I will be the 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, Christine, and welcome everyone to the NOW Inc. first quarter 2016 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 the New York Stock Exchange ticker symbol throughout our conversations this morning. In addition to these brands, we're very excited about new brands added to the DNOW family during 2015, 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 first quarter ended March 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 risk 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 covering our Q1 results and key takeaways, which should assist you in understanding our first quarter performance. 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 Q1 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 question. But, first, let me turn the call over to Robert. Robert R. Workman - President, Chief Executive Officer & Director: Thanks, Dan. Welcome to DistributionNOW's Q1, 2016 earnings call. Tuesday afternoon, our employees at Fort McMurray, Alberta, Canada branch had to evacuate due to a wildfire that has made its way into several of the local communities and the town. Fortunately, all are safe and have found shelter. Before we get started I'd like them to know that our thoughts and prayers are with them. The first quarter of 2016 proved to be as challenging as the many preceding quarters with the U.S. and Canada rig count dropping 23% sequentially and 57% versus the year ago period. While production in the U.S. peaked several months ago, oil storage is proving quite stubborn and is rivaling levels from over 80 years ago. Until production declines translate into meaningful oil inventory storage reductions in the U.S., I believe we will continue to operate in a challenging upstream environment. One of our midstream customers recently hosted their leadership team meeting at my property Northwest of Houston. I first met many of these executives when I was a delivery driver in our Bryan, Texas branch 25 years ago. At that time, a large number of them worked for Union Pacific Resources. Over dinner one evening last week, we were reminiscing about how dire activity was in the Bryan area before the Austin Chalk gained its momentum. Looking back today, we all agree that the word dire is a relative term considering the fact the Bryan area currently has one drilling rig operating today, which is significantly worse than the pre-chalk area from 25 years ago. Without question, today's operating environment is the most challenging any of our teams have experienced. Even though some of our largest revenue streams are being negatively impacted like never before, in part due to wells being drilled but not completed whereby tank batteries or hook ups are not being constructed. And at a time when both onshore and offshore drilling rigs are being stacked or scrapped, providing significant excess inventory available to be cannibalized, our employees continued to produce strong revenues per operating rig by growing share across our customer base. Q1 2016 revenue for global operating rigs remained flat sequentially at $1.3 million and $1.1 million with and without 2015 acquisitions respectively. This is quite an accomplishment by our employees all while a strengthening dollar negatively affected revenues by $6 million and $19 million sequentially and year-over-year respectively. There's nothing I can say that would adequately express my appreciation for the hard work and results our employees continue to produce and what we hope will be and have been the worst industry downturn of our careers. Before moving on to the business, I'd like to thank one person in particular today. I'd like to recognize Merlin Theroy (06:01) who started his career with Continental Emsco in the Virden, Manitoba, Canada branch in 1972. Working through every support role in the branch, Merlin (06:09) went on to work and learn in the Taber and Swan Hills branches while opening new locations in Grand Prairie and Peace River. Merlin (06:17) eventually joined DNOW and is part of our artificial lift sales team after several acquisitions, culminating when we acquired CE Franklin. I'd like to take the opportunity to thank Merlin (06:27) for his more than 44 years with DNOW and hope we're fortunate to celebrate many more milestones with him in the future. For the first quarter of 2016, we reported a net loss of $63 million. This includes pre-tax charges of $3 million for high-steel content inventory cost adjustment driven by falling steel prices, $4 million for severance and acquisition-related expenses, and $23 million for an after-tax charge for our deferred tax asset valuation allowance for the first quarter of 2016. Earnings per share for the quarter was a loss of $0.59 or a loss of $0.35 per share after adjusting for severance, acquisition expenses and the deferred tax asset valuation. After taking into account the impact of falling steel prices on our inventory, earnings per share for the quarter would be a loss of $0.33. Cash generation in the business remained strong as we generated $89 million of cash in the quarter from operating activities compared to $80 million delivered in the fourth quarter of 2015 and $324 million net cash from operating activities that we produced during the full year 2015. Sequentially, we'll move from a net debt position of $18 million in the fourth quarter of 2015 to a net cash position of $76 million and had cash on hand of $131 million at the end of the first quarter of 2016. Interest expense was less than $1 million in the period. Total head count was reduced by approximately 425 during the first quarter of 2016, 65 of whom were from companies we've acquired since becoming a standalone public company. Excluding acquisitions, by the end of Q1, 2016 we've reduced head count by about 1,650 or approximately 30% of the workforce since the late 2014 peak, while we've added back well over 800 new employees from acquisitions. We've closed or consolidated eight branches and added one location in the first quarter of 2016. We've closed or consolidated 84 branches and added 20 locations organically while acquiring 46 locations since 2014. Headcount has been reduced by over 100 in the month of April. We plan to integrate several large facilities in the coming months, and unfortunately, as this market malaise persists, we'll have to close additional facilities in this quarter and beyond. In the first quarter, excluding the impact of full period fourth quarter acquisitions, we realized a sequential warehouse, selling and administrative cost saving of approximately $4 million attributed to head count reductions, as we guided to $3 million or better in expense reductions on our last call. However, this was offset by increased severance costs as we made more reductions in plants and increase in bad debt cost primarily attributable to bankruptcies and elevated fringe benefit costs sequentially. Outside of new acquisitions, we believe we can achieve cost reductions of $5 million to $7 million in the current quarter. Assuming the elevated charges related to bankruptcies and obsolescent inventories that occurred in Q1 2016 persist, we believe breakeven revenue and rig count is still running around Q3 2015 levels of $750 million and 2,200 rigs globally. However, if these balance sheet account challenges return to historical levels, combined with the considerable expense reductions we have made over the last several quarters and those planned for future periods, we believe breakeven revenue and rig counts will be reduced. We will continue to take prudent steps to reduce expenses in all areas while ensuring we have the human capital and infrastructure to support current customer activity and to grow share in a recovering market. Even though we were able to reduce inventory and receivables by $132 million sequentially, working capital as a percent of revenue, less cash, remained flat at 35% due to an almost 15% decline in revenue. Despite a modest increase in steel content inventory-related charges which accounted for continued dropping steel prices that totaled $5 million and $3 million for Q4 2015 and Q1 2016 respectively, gross margin percent dropped from 16.5% to 15.9% sequentially. Product pricing remains depressed but hasn't worsened from the early quarters in the cycle. The largest contributor to sequential gross margin erosion was lower vendor consideration as reduced purchases and lower turn rates diluted these benefits, paired with increased freight costs relative to revenue as we redistribute inventory and ship lower value orders. We've seen an uptick in steel prices that started in February and has continued through April, driven by a rise in iron ore, scrap and the Chinese steel market. Iron ore has risen back to the levels last seen in mid-2015 and scrap has almost doubled in price since early March. This has caused a spike in the hot-rolled coil price, supported by the favorable preliminary determination of a dumping suit filed in the USA for hot-rolled coil. This is set to finalize in August 2016. The Chinese mills cut back production in late 2015 and early 2016, but rumors abound that some of the shut-in production is not coming back online as a result of higher steel pricing. If accurate, this will maintain downward pressure on pricing. In an effort to shore up steel pricing in their respective markets, we expect more dumping suits to be filed globally. U.S. Steel filed a Section 337 trade case April 26 to block all Chinese steel from entering the USA. Also, late last year, Canada added hefty additional import duties on Chinese pipe as the result of a dumping suit. Seamless pipe pricing declined in the quarter by more than 4%. The price from the pipe mills seem to be leveling out due to a rise in steel input costs, although the mills are sorely lacking demand due to the continued fall in drilling, which affects OCTG. We reduced inventory sequentially by $60 million in Q1 2016 and we will continue our efforts to reduce inventory to align with demand. We saw some prices on steel products other than pipe fall 25% in the quarter basically due to lack of demand and pricing pressures from others. We're still expecting mergers, consolidations and closures to help rationalize the steel and steel products manufacturing base as the rig count continues to fall. Diving deeper into the quarter, full quarters of the Updike and Challenger acquisitions added a total of about $7 million incremental revenue in Q1 2016 to both our energy center and supply chain unit. Sequential revenue in the U.S. declined by 18% versus a rig count decline of 26%, enabling the U.S. to strongly outperform sequential rig count declines where operator customer revenue increases in the Permian, Rockies, Bakken, and Alaska, as well as the beginning ramp up of revenues with the ETC DAPL midstream project, and the implementation of our supply chain services agreement which Hess in the Bakken, Permian, Utica and Gulf of Mexico. In addition to general across the board activity declines related to the 26% rig count reductions, we experienced large decreases in the Eagle Ford where one of our midstream customers rushed to complete project in Q4 2015. Inquiry levels for large pipe orders are picking up but have yet to translate into increased orders as projects continued to be delayed or canceled altogether. That said, there are some positive signs that we may be approaching a favorable market environment as domestic supply capacity of up to 16-inch pipe was down considerable sequentially and we began to see some of our pipe mills increase prices late in the quarter. Of our two largest supply chain operator customers, one reduced purchases of around one-third as they redeployed current surplus asset to meet internal demand and the other reduced purchases by over one half as they pushed the pause button on practically all spending and reduced their rig count from six to two sequentially or down 20 from the same period last year. Downstream revenue declines were driven by delays in our centralized capital projects team and turnaround as well as general project activity declines from several large customers in the Western U.S. Our supply chain services machine tool and manufacturing lines are still feeling the impact of a depressed manufacturing environment, although late in the quarter trends started to show improvement. Several public indices are reporting manufacturing declines of 3% to 12%, which is only compounded by the much larger declines with our energy manufacturing customers. Moving to our Canadian operations, while the rig count there was down 6% sequentially or 47% year-over-year, our revenue declined about 20% sequentially, driven primarily by completions dropping over 50% in British Columbia where some of our most active customers operate. Certain places in Canada such as the Montney, Duvernay, Viking and Cardium, which have held up better in the downturn in most areas, began to succumb more heavily to the low oil price environment in the quarter. Some bright spots in Canada include revenue increases related to share gains with Exxon-Syncrude and Cenovus through recent contract awards for pipe, fitting and actuated valves. Our largest international revenues decline came from our export group Latin America, the Middle East and the North Sea who all continued to feel the pinch from deepwater drilling contractors, who are stacking and scarping rigs and redeploying their large inventory investments. For the quarter, our international segment had to overcome non-recurring project orders with Caspian Drilling and M.H. WORKS (16:22) that were billed in Q4 2015, reduced purchasing from Chevron, Cabinda and BP in Angola, and general activity declines in Mexico and the North Sea. Overall, the international segment outperformed sequential rig count declines with Australia being a bright spot in the quarter, where MacLean Electrical built a large non-recurring project to Wheatstone and we experienced a nice increase in sales of artificial lift to customers such as Queensland Gas. During the downturn, we have been focusing on deepening our relationships with our critical suppliers, working with them to identify cost saving or market share opportunities for both organizations, without comprising customer service. One example is Cameron, where we were awarded a global distribution partnership for certain key product lines. We've broadened our offering for engineered valve lines where Cameron previously went direct and DNOW will now distribute those products globally. Looking at market activity moving forward, we clearly still have many challenging months in front of us. The U.S. rig count is already down another 21% so far this quarter and Canada is in the midst of breakup, although I'm not sure how many more rigs they can actually drop since they're currently at 37 operating rigs. On earrings calls in the last few weeks, several offshore drilling contractors have announced more scrapping and stacking of rigs, which will in turn add more surplus inventory to the market to be redeployed and cannibalized across their operating fleets. While all of these actions further challenge our operating environment, they also set the stage for higher demand for our products and services when the market corrects. When customers increase activity, the amount of product they'll need to restock operator warehouses and rigs and the pipe, valves and fittings required to complete wells will benefit DNOW exceptionally well since we will be at the front edge of the recovery just as we were in the decline. While oil prices have rebounded from the high $20s and are now into the mid $40s, it is anyone's guess where WTI will go from here. Analyst opinions for oil prices are still all over the board and public guidance given by operators is equally unclear. Some analysts are calling for $65 oil in the second half of the year while others are forecasting a pullback. A few customers say they will start completing the almost 5,000 drilled but uncompleted wells or DUCs that are currently in inventory in the U.S. if oil stabilizes at above $45 and others say they'll start putting rigs back to work if oil reaches $50 and they get comfortable that it won't retract. Assuming none of this materializes in Q2, scheduled large line pipe orders for OXY and Sasol, continued ramp up from the implementations of our supply chain services contract with Hess, our midstream project management program for ETC DAPL, and the rollout of our recently awarded manufacturing supply chain contract for Alcoa will likely not be enough to offset continued rig count declines in the U.S., breakup in Canada and large non-recurring international project. We will stay the course for the strategy we've employed since the market decline started in late 2014. We plan to grow organic share in a declining market, prudently reduce expenses and tightly manage the balance sheet to reduce risk and bring efficiencies, all while keeping an eye on the future and positioning DNOW to meet customer service demands and a market recovery. Moving on to capital allocation, even though we're off to a strong start in 2016 by generating $89 million of cash in Q1, working capital as a percent of revenue is still 35% excluding cash, so we have more work to do in shrinking our balance sheet in this market environment. Capital expenditure requirement in this business are low, having decreased sequentially from $3 million to $1 million for the quarter. We continue to see the best use of our cash and line of credit to be investing in high-value-add acquisitions that expand the products, services and geographies that allow DNOW to differentiate ourselves in our market. One of the major consulting firms announced that 2016 started off with lower overall deal count and value globally. We agree with this on the volume side and many of the deals that were marketed in Q1 were distressed transactions. Unfortunately, I think we will see more of those this quarter. While we've looked at some of these opportunities, we continue to be more comfortable sticking to our guns, not pursuing turnaround and taking organic share from these competitors as they struggle to survive in this market. We continue to build out higher value add product lines and services. You saw this with the deal we announced last Friday. We signed and filed for HSR approval for Power Service out of Wyoming. Power Service provides rotating and process equipment, engineering, design, installation, fabrication and service solutions. They distribute OEM parts including pumps, generator sets, air compressors and blowers and fabricate custom Lease Automatic Transfer Custody units or a LACT unit, Vapor Recovery Units, ASME Code Vessels and Water Production skids serving the Upstream, Midstream and Downstream oil and gas markets as well as the Mining, Power Generation and General Industrial Industries. Their turnkey tank battery solutions would provide a number of synergies for DNOW. There are few businesses in the U.S. who offer their solutions but not at the same level of quality. This would solve one of our supply chain customer's requests that we've had for years. This business would benefit greatly when customers start completing the DUCs as they are able to deliver a complete tank battery solution immediately after the completion company finishes fracking the well and will accelerate the time it takes for our customer to get oil and gas to market. Power Service also consumes high volumes of pipes, valves and fittings and other core DNOW products during the process of fabricating these modularized solutions and they would benefit from our supplier relationships, scale and access to inventories in our network. Integrating with them would also raise DNOW's valve actuation business services to a tier-one level by applying Power Service's core competencies around spooling and valve modification. It would also give us the opportunity to leverage our Odessa Pumps infrastructure in the Permian and Eagle Ford and DNOW's pumping solutions businesses in the U.S., Canada, and abroad with product lines for which Power Service has distributorships to continue to grow customer participation organically. We do have other deals in the pipeline that we're reviewing but we're continuing to watch the market and be fiscally conservative. We continue to pay down debt so that we don't get to too far out over our skis and are well positioned to fund this business through a market recovery. M&A is still very much a part of our growth strategy, as is organic grow, but we want to make sure that we're allocating capital responsibly and managing the synergies that we expect from our existing acquisitions before moving on to our next deals. Before turning the call over to Dan, I want to thank our shareholders, employees and analysts that cover DNOW for your continued support and interest in what is clearly one of the most challenging times in our industry. Dan? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Robert. It's been almost two years since we spun off from National Oilwell Varco, and I continue to be proud of the efforts of our wonderful workforce, as we created a standalone world class provider of products and solutions to the energy and industrial market. It is disappointing that for the most part we've been in this downturn in our industry, a downturn which may be considered one of the worst of all time when it's finally over. I am thankful for our dedicated, hardworking employees who make me proud as they continue to emphasize serving our customers despite the industry headwinds they face each day. They are the true assets here at DistributionNOW. We will continue to concentrate on the needs of our customers, while focusing on producing long-term value for our stakeholder. Robert discussed our business and I'll say more about our financials. NOW Inc. reported a net loss of $63 million or $0.59 per fully diluted share on a U.S. GAAP basis for the first quarter of 2016 on $548 million in revenue. This compares with a net loss of $249 million or $2.33 per fully diluted share on $644 million of revenue in the fourth quarter of 2015 which included goodwill, impairment and other costs. When looking at a year-ago quarter, we had a net loss of $10 million or $0.09 per fully diluted share on revenue of $863 million for the first quarter of 2015. The first quarter 2016 results included $4 million in pre-tax acquisition related and severance charges and an after-tax, deferred tax asset valuation allowance of $23 million. Excluding these other costs, our net loss was $38 million or $0.35 per fully diluted share. Also included in the first quarter ended March 31, 2016 results but not characterized as other costs, was a pre-tax charge of $3 million or $0.02 a share for high steel content inventory cost adjustments relating to continued falling steel prices. Gross margin was 15.9% in Q1 compared with 16.5% in the fourth quarter of 2015 reflecting continued inventory cost adjustment and ongoing price pressure. The company generated an operating loss of $65 million in Q1 compared with a loss of $46 million in Q4 after excluding the fourth quarter goodwill impairment charge. First quarter EBITDA excluding other costs was a loss of $51 million. Looking at operating results for our three geographic segments, revenue in the United States was $357 million in the quarter ended March 31, 2016, down 18% from Q4 but less than the 26% sequential decline in the U.S. rig count. Q1 revenue in the U.S. was down 41% from the year ago quarter, with the decline being less than the 60% fall in the year ago U.S. rig count as acquisition revenue improved our position. Reduced customer spending and delayed projects were contributing factors to these revenue declines. First quarter operating profit in the U.S. was a loss of $59 million compared with a $45 million loss in the fourth quarter of 2015 after excluding goodwill impairment and a loss of $12 million in Q1, 2015 reflecting revenue declines and deflationary pressures at these low volumes. In Canada, first quarter revenue decreased 20% sequentially to $63 million and down 46% from Q1 2015, reflecting the declines in the Canadian rig count and well completion. The Canadian dollar continued to weaken relative to the U.S. dollar, adversely impacting revenue, falling 3% in the first quarter of this year and 7% year-over-year. For the three months ended March 31, 2016 Canada's operating loss was $6 million compared with a $1 million operating loss in Q4 and an operating profit of $3 million in the year ago quarter. The decreased operating loss from Q1 2015 was essentially due to deteriorating market activity, partially offset by expense reduction. International operations generated first quarter revenue of $128 million, which was down 3% from the fourth quarter of 2015 versus an international rig count decline of 8% and down 12% from the year ago quarter compared with a 19% rig count decline from the year ago quarter. Additional revenue provided by acquisitions was offset by decreased international rig activity and customers focusing on using owned inventory. International operating profit for the first quarter of 2016 was zero, similar to fourth quarter of 2015 and compares with $1 million in the year ago quarter. Revenue channels for the first quarter shows 75% through our energy centers or stores, as many of us know them, and 25% through our supply chain services location. Looking at our income statement, warehousing, selling and administrative expenses were $152 million, same as the fourth quarter of 2015. 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 warehousing, selling and administrative expense by more than 25% since the end of 2014. The effective tax rate for Q1 2016 was 5.2%, based upon the Q1 loss we recorded and an additional deferred tax asset valuation allowance of $23 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 provisions for income tax. As we return to profitability, we would be able to adjust the valuation allowance, thus reducing income tax expense in future periods. The effective tax rate for the full year 2016 should be in the mid single-digit. Turning to the balance sheet, NOW Inc. had working capital of approximately $900 million at April 31, 2016, which was 41% of Q1 annualized sales, 35% when cash is excluded. We still strive to get to 25%, again. Accounts receivable was $413 million at the end of the first quarter, a reduction of $72 million during the quarter. Since beginning of last year, we reduced AR approximately $438 million or 51%. We continue to be diligent as bankruptcies are on the rise in our energy space. Inventory was $633 million at the end of Q1 or $60 million lower than year end. We have slowed the inventory replenishment process and should continue to show reduction. Inventory is down $315 million since the start of last year despite increased inventory from our acquisition. Our current day sales outstanding were 59 days which has improved over the mid-80s in the year ago quarter and we continue to work on improving these results to closer to the 60 day range. Inventory turns were 2.9 times. Cash totaled $131 million at March 31, 2016, up $41 million during the quarter with approximately two-thirds of our cash located outside the U.S. We ended the quarter with $55 million borrowed under our credit facility, a reduction of $53 million during the quarter. Our borrowing cost on this debt averages 2.6%. Capital expenditures during Q1 was approximately $1 million. Free cash flow for the first quarter was $88 million. So far in 2015, our worldwide market continues in decline. While we look forward to better time, we will continue to focus on serving our customers with our global footprint. 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, strong financial resources and we believe this current downturn creates new opportunities for us and our shareholders as we position ourselves for the inevitable upturn. With that, Christine, let's open it up to questions.

Thank you. Our first question comes from Ryan Cieslak from KeyBanc Capital. Please go ahead. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Ryan.

Hi, good morning everyone. Robert R. Workman - President, Chief Executive Officer & Director: Morning.

So I guess maybe the first question is, I want to get maybe a better sense of how to think about the recent Power Service's acquisition. Any color you can provide, maybe on the type of sales they had, the margin profile? I know that hasn't closed yet, but any additional information on that would be helpful. Robert R. Workman - President, Chief Executive Officer & Director: Yeah, so we haven't closed yet and it's impossible to forecast when it actually will close since it's now in the government's hands. But they run – I think in 2014 they published, they ran $270 million of revenue and they're selling to the same customers we are and so we're off by half so I would imagine they'll be off about half this year. And, obviously, their margins are pressured just like ours right now so right now, they're running low single-digit EBITDA but that will definitely improve, back to their historical levels whenever the market recovers.

And is there – the way to think about the geographic breakout, I mean I'm assuming that's concentrated in the U.S. but is there any Canadian exposure or how much directionally if they have any Canadian exposure would that be? Robert R. Workman - President, Chief Executive Officer & Director: So they've grown their business considerably over the last three or four years by focusing on most of the plays that are in the Rockies and the North Dakota Bakken. One of the exciting things about this is that by using our supply chain services customers' agreements, by leveraging our Canadian infrastructure which they don't have, we believe organically – and Odessa Pumps on top of that – we believe organically we can grow this thing pretty considerably.

Okay. And then thinking about the pricing environment, it sounded like things remained depressed but aren't getting any worse. You commented on the steel prices starting to tick up here. How do we think about maybe how, if we continue to see an uptick in steel prices, how that would actually flow through in terms of maybe starting to realize some price increases in terms of maybe just what the lag would be at the end of the day? David A. Cherechinsky - Chief Accounting Officer, VP & Controller: Hey, Ryan. This is Dave. I think we're excited about what looks like some uptick in pricing. What we're still seeing though is we're seeing a lot of enquiries and not a lot of orders, so the demand hasn't caught up with that. We're a little nervous that those price increases won't be permanent but if we start to see some improvement, we see the slack come out of the industry inventory and our inventory, then we would expect to see nice forward progression in pricing and gross margin and reduce inventory charges as we start to see that river of product flow expand. So, it really depends on the inventory that's in the market, customer demand and the timing of any kind of recovery in sales there.

And are you seeing anything on the initial price increases on the valve and fitting side or is it still too early at this point to see a price increase on that product line, at this point? David A. Cherechinsky - Chief Accounting Officer, VP & Controller: Generally, we're not seeing product increases on product lines except for you know steel producers trying to put a floor on the pricing they have. So, no, we're not seeing forward movement otherwise except in pipe and that has yet to stick in terms of pricing on actual orders delivered.

Okay. And then maybe just the last question and I'll hop back in the queue is I think there was some commentary in the prepared remarks about bad debt cost. I'd just be curious to know how incremental that was in the quarter relative to maybe in the fourth quarter even on a year-over-year basis. David A. Cherechinsky - Chief Accounting Officer, VP & Controller: Sequentially, it was about $1 million increase. Year-over-year I don't have that figure handy, but you know what we're seeing is our customers being more stressed financially, as you would expect. And customers are demanding longer terms and some simply can't pay their bills, so we're seeing an uptick in that expense. Again, as the market bottoms and that we see some recovery, hopefully that will abate but that would be sequential increase.

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

Thank you. Our next question comes from Sean Meakim from JPMorgan. Please go ahead.

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

So you guys had good working capital release and free cash in the quarter, but as you noted, we're still at 35% working capital-to-sales given the drop in the top line. So I just was curious, if you had a better sense of, as we go through 2016, how much working capital release do you think is still available. And then do you expect that ratio can improve pretty meaningfully if we even just get to a stabilization in activity? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So we still expect $150 million to $200 million of cash generation from operations for the full year, and yes we would expect the ratio to improve as revenue stopped dropping. Obviously, in the calculation, if revenue is headed downward, it exaggerates the working capital as a percent of revenue calculation.

Exactly, okay. And then just to touch on the Power Service deal, you noted some synergies in the prepared remarks with respect to some customer pull through demand on that side, just for some new offerings, specifically. Just curious, how does that competition look in that area in terms of how unique this offering set is relative to what else is in the marketplace? Robert R. Workman - President, Chief Executive Officer & Director: Yes, it's very unique. In fact, one of our top three customers came to me, specifically, about three years ago, asking us to come up with some solution, whereby we could prefab and speed up the time it takes to build a tank battery. So after the frac crew leaves the tank battery, typically what happens is that the operator will call somebody and order the tank and somebody order the heater treaters and oil water separators and power construction crews and then call DNOW or one of our competitors to deliver many, many trailer loads of pipe, valves and fittings and then they build a facility onsite. And so, they're not producing oil and gas that's available for 30 to 60 to 90 days depending on the size of the facility. What this company does is they prefab and modify these modulized units and have them ready to go. So whenever the frac crew leaves the site, they deliver several skids that do the same thing that this home-built system does and then they plumb it together with a control unit and you can drastically expedite the amount of time that the customer can get their oil and gas in the pipeline and start making money.

Yeah, that sounds like a pretty substantial savings. Okay, great. Thank you. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

Thank you. Our next question comes from David Manthey from Robert W. Baird. Please go ahead. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Hi, good morning guys. Robert R. Workman - President, Chief Executive Officer & Director: Hi, Dave. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Robert, you said you expect $5 million to $7 million lower costs ex-acquisitions, I believe. And is that a quarterly run rate from the first quarter levels and after you include costs related to acquisitions that have already been done, what is the net reduction that you would expect there? Robert R. Workman - President, Chief Executive Officer & Director: Well, Dave, it is $5 million to $7 million down or compared sequentially to Q1. That assumes that the charges we've been taking for inventory and for bad debt continue in Q2 so that would be upside if that doesn't repeat and then we would expect to continue to cut. So we're going to cut costs in Q2 so you'll see even more in Q3, but it all depends on what happens with some of our customers' accounts receivable with us. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And I assume that $5 million to $7 million – you're saying that excludes acquisitions. Clearly that excludes the new Power Service acquisition as well. Will you readdress that at a later time? Robert R. Workman - President, Chief Executive Officer & Director: I definitely will. I'm not really addressing what you should consider for Power Service in the current quarter because the government's got at least a month that they'll be working on it. Then we have to get it closed and so we're only talking about a few weeks of impact, so it's really going to be negligible. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Got it. Okay. And then you clearly saw a negative impact from lower supplier incentives on gross margin. Could you quantify that for us relative to what you saw a year ago? David A. Cherechinsky - Chief Accounting Officer, VP & Controller: Well, listen, Dave, we don't really disclose that kind of information. We consider it proprietary commercial, it's a pricing kind of information. So it's a function of volume really. And what we've seen is we're still burning off inventory and our purchases are declining. So I'd really rather not cite a number, but – and it usually doesn't have that kind of impact on the activity but we're projecting lower sales in the first half of the year so it's driving that number down. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. So, but the majority of the change would be related to mix or price or something else? David A. Cherechinsky - Chief Accounting Officer, VP & Controller: That's right, that's right. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. All right, thank you.

Thank you. Our next question comes from Matt Duncan from Stephens. Please go ahead.

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

Robert, you had a little commentary in your prepared remarks about sort of the challenges in 2Q versus 1Q and some of the benefits that you'll have there. I guess it sounds like net-net we should expect sales to be down. Do you have any thoughts on sort of the percentage decline sequentially in revenues that you would expect based on sort of where rig count is and what you're seeing in the business? Robert R. Workman - President, Chief Executive Officer & Director: Matt, that really depends on what rig count does for the next two months. We've been consistently putting out around $1.3 million of revenue per rig. So it's anybody's best guess what happens with the rig count. So if you make up your rig count forecast, you can apply the number and that should be pretty close.

Okay. And then in terms of oil price and where it would drive increased activity, just want to think through sort of how this impacts your business. So it sounds like mid-$40s are better. If we sustain that level, we'll see these DUCs start getting completed. That's going to result in tank battery work. Theoretically, the acquisition of Power Secure or Power Service rather, then becomes very, very well timed. So would you expect to see the revenue per rig go up from that $1.3 million level, given that rig count wouldn't yet be recovering but you would start to see some of that tank battery work come through? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. My assumption would be and – there's a lot of variables in this, but if what happens is some of these companies in the $45 to $50 range start completing the DUCs, but no one picks up rigs, you might see a weird blip in our revenue per rig being exceptionally high because all that revenue would come in with no corresponding rig count.

Right. And then it sounds like it's sort of a $50-plus level before you're going to see any kind of movement in rig count, right? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. I read all of our customers' reports and they tell us all the same thing publicly, but I haven't seen anyone say they're going to pick up rigs at less than $50. And some are saying, they won't pick up rigs until we get to $65. So in the $50 to $65 range if it's sustainable, I think you're going to see people start adding back rigs.

Okay. And then last thing, just back to the Power Service deal. So it sounds like there's maybe a pretty meaningful cross-sell opportunity there in this tank battery market. I'm assuming that we can, obviously, guess who the competitor would be for the PVF on those tank batteries that you'd be maybe able to take some business from. Talk about the competition in the pump/package market in that fabrication business. Who else is building those packages for tank batteries? Is anyone else really targeting that market or is there something that Power Service does really well that others aren't really targeting as much? Robert R. Workman - President, Chief Executive Officer & Director: I've visited lots of folks that are trying to pull this together. I've seen companies that are trying to form alliances so you have a fabricator and a tank manufacturer and a pump distributor all getting together, trying to pull together a joint venture per se. I haven't seen it come to fruition. I've only seen one other company that actually does what Power Service does and the quality isn't nearly as high and they're not nearly as successful in this space. So I think they really standout right now in the market around their position. They've almost invented this particular solution on their own back starting about seven years ago. And so there's a lot of good synergies because so Power Service, as you can imagine, when they fabricate a skid unit, they buy a lot of pipe, valves and fittings. I mean it's one of their biggest spend categories and currently that's going to one of my competitors, so that will be brought in house. They're paying resale price so their margins will improve as they utilize our vendors in our costing, that we will use our sales force that have all these operator relationships to grow their share organically. And then one of the most sexy parts about this is the fact that they have distributorships for some really important pump lines for all of the Western U.S. that will really benefit Odessa Pumps.

Okay. And then last question on this then, what is your revenue content right now in a typical tank battery and what is their revenue content in a typical tank battery? Just trying to gauge how much it's going to increase your average revenue in a tank battery? Robert R. Workman - President, Chief Executive Officer & Director: You know what, Matt, I don't know. I've never asked them what their typical revenue per tank battery is. I know ours ranges from 200 to 400 (48:29), depending on how many wells are on that tank battery and theirs will be substantially higher than that because that would include the pumps which I don't typically sell and that would include the elimination of the tanks and the treaters and the dehydrators and all that stuff and the control unit. So I really don't know, I don't mind sharing it with you when I get it or share it with everybody when I get it but I just don't have it.

Okay. All right, no worries, thanks guys.

Thank you. Our next question comes from Walter Liptak from Seaport Global. Please go ahead.

Hi, thanks. Good morning everyone. Robert R. Workman - President, Chief Executive Officer & Director: Good morning, Walt. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hey, Walt.

I want to ask about the – you started the commentary about the Fort McMurray fires and I just wondered if you're thinking that there's going to be disruption in the second quarter, what kind of impact that could have on revenue. Robert R. Workman - President, Chief Executive Officer & Director: But it's kind of early to forecast but I can't imagine that that fire is not going to create all sorts of troubles for everyone working in the oil sands. I mean there's one road in and there's one road out and a big part of that town has now been pretty much burnt. People have evacuated, so our branch is shutdown, operators have evacuated some of the camps that house the employees that work in the oil sands, those have been burned down. So it's really early to tell but I would be blown away if it didn't impact that particular region negatively for some time to come.

Okay. Could you help size it for us like in 2015 how much revenue came out of that region? Robert R. Workman - President, Chief Executive Officer & Director: I really don't know, Walter, what our revenue is for the oil sands standalone. We've never actually gotten. I've never had that data before. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: But if you look at total Canada, I mean Canada surely has been lagging though I mean it's a small number. It's a small piece of the total pie, all of Canada is a small piece. So then you get into this, I don't want to minimize the importance here and we certainly need to be conscious of our people and all the people there, but I don't think it's going to move the needle, Walt. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. I would say Walt, our largest revenue in Canada is probably Saskatchewan and then BC and then the Alberta oil fields and then the oil sand.

Okay, okay, great, fair enough. On the acquisition, have you announced what the price is yet, that you negotiated? Robert R. Workman - President, Chief Executive Officer & Director: Yeah, we've not disclosed any of that.

Okay, great. Thank you. Robert R. Workman - President, Chief Executive Officer & Director: Thank you. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Take care, Walt.

Thank you. I will now turn the call back over to Robert Workman, President and CEO for closing statements. Robert R. Workman - President, Chief Executive Officer & Director: Okay. I'd like to thank everyone for your interest in DNOW and we look forward to talking to you about our second quarter results for 2016.

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