Dnow Inc. (DNOW) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Second Quarter Earnings Conference Call. My name is Jason, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Senior Vice President and Chief Financial Officer, Dan Molinaro. Mr. Molinaro, you may begin. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Jason, and welcome, everyone to the NOW Inc. second 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 our New York Stock Exchange ticker symbol throughout our conversation this morning. In addition to these brands, we're very excited to welcome the newest addition to our DNOW family, Power Service, Inc. headquartered in Casper, Wyoming. Robert will tell you more about them during his remarks. Before we begin the discussion on NOW Inc.'s financial results for the second quarter ended June 30, 2016, 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 filed 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 on our filings with the SEC. In an effort to provide investor with additional information relative to our results as determined by GAAP, you'll note that we disclosed various non-GAAP financial measures in our quarterly press release, including EBITDA excluding other costs, net loss excluding other costs and diluted loss per share excluding other costs. Each exclude the impact of certain other costs and therefore has not been calculated in accordance with GAAP. A reconciliation of each is included in our press release. As of this morning, the Investor Relations section of our website contains a supplemental presentation covering our Q2 results and key takeaways, which should assist you in understanding our second 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 Q2 Form 10-Q later today, and it will also be available on our website. Later on this call, I will discuss our financial performance, and we will then answer your questions. But first, let me turn the call over to Robert. Robert R. Workman - President, Chief Executive Officer & Director: Thanks, Dan. Welcome to DistributionNOW's Q2 2016 earnings call. In late 2014, I recall being on the road visiting analysts and shareholders during the few quarters immediately following our spinoff into a publicly traded company. By that time, folks were already smelling some weakness in the energy markets, and investors often questioned me about what type of impact that might have on our business. At that point, we were still extremely busy in an active energy market while simultaneously working through issues related to an organization-wide ERP rollout, all of the associated noise surrounding our spin, integrating three large distribution businesses, and building out corporate competencies in the areas of tax, legal, treasury, investor relations, IT, et cetera. When I would get questions related to how I felt about potential market softness, my response was always that a bit of a pause in the market could prove useful, as it would allow us to apply more resources towards completing spin-related projects. As of late, many of these same shareholders and analysts are somewhat tongue-in-cheek asking me if I got enough pause in the market. The resounding answer is that I got well in excess of the pause I was describing, and I'll be much more careful about what I ask for in the future. Consistent with the past several quarters, Q2 2016 experienced continued declines in activity and rig counts globally. Despite these challenges, our dedicated, seasoned employees continue to exceed expectations by finding ways to grow the business organically. Today, I have the distinct pleasure of not only recognizing one of those employees who has been contributing to share growth, but I also get to call out a close personal friend. At the end of this year, Bob Weber in our Denver office will be celebrating his 44th company anniversary with DNOW. Bob started his career with National Supply in 1972 in Casper, Wyoming as a store trainee. Besides being one of the nicest human beings on this planet, Bob has an amazing customer following. Anytime I travel with Bob and we need to get from point A to point B, we have to avoid all gatherings and crowds, as it seems there is no one from the Bakken to the Niobrara that doesn't know Bob and want to pull him aside to get some of his time. I could tell funny stories about Bob for hours. A jar of a thousand pennies in my office and a trip to Cherry Hills Golf Club come to mind, but he'd probably never forgive me for doing that. Bob, thanks for everything you do for DistributionNOW, and please stop talking about retirement. Today we reported a loss of $44 million for the second quarter of 2016, with a net zero impact from other costs for the quarter. Other costs, net of tax, included $3 million for a deferred tax asset valuation allowance release, offset by $3 million in acquisition related and severance charges. Earnings per share for the quarter was a loss of $0.40 compared, to a loss of $0.59 in Q1 2016 and a loss of $0.40 excluding other costs for the quarter. Revenue for global operating rigs grew to $1.4 million in Q2 2016, or $1.3 million excluding acquisitions completed in the last year. Sequentially, EBITDA excluding other costs improved by $9 million, while revenue dropped by $47 million. Gross margin percent increased 0.7%, mainly attributable to lower steel price devaluation pressures. Product margins continued to remain at the depressed levels first realized in Q1 2015. On our last call, we said we expected $5 million to $7 million of sequential warehousing, selling and administrative, or WSA, expense reductions in Q2 2016. We actually achieved a $10 million reduction in WSA expenses when excluding $2 million contributed by acquisitions and a $4 million fringe benefit credit we do not expect to recur in the third quarter. From the peak in 2014, and removing the fringe benefits credit we received in Q2 2016 of $4 million, on an annualized basis, we have cut more than $230 million of WSA expenses from the business, excluding acquisitions, since the downturn began. When we emerge from this challenging period and when charges related to bad debt and inventory obsolescence return to normal levels, combined with the expense cuts we've made and prices recovering, we believe we can achieve EBITDA breakeven on revenue approximating $700 million. Determining what rig count would be required to support that level of revenue is becoming increasingly difficult, as our revenue per global operating rigs continues to hold up in the face of high levels of drilling rig inventories being cannibalized, especially in the offshore arena where floaters continue to be scrapped. Complicating this measure further would be the top line impact that could result if DUCs were completed without an associated rig count increase. Based on current activity levels, realizing a full quarter of Power Service expense, normalization of benefits cost and additional expense cuts, we expect WSA expenses to increase about $5 million sequentially in Q3 2016 outside of any unexpected charges. Non-acquisition head count dropped 223 sequentially for 1,870 since the peak in late 2014 of 35% reduction during that period. Headcount added through acquisitions over the last seven quarters currently stands at 1,151, which is an increase of 274 from Q1 2016. From a branch perspective, we have closed 99, opened 21, and acquired 53 since the peak in 2014. On falling sequential revenue, DSOs dropped from 69 to 64 and inventory turns were 2.8 times. Excluding cash, working capital as a percent of revenue improved from 35% to 33%. Sequentially, we moved from a net cash position of $76 million to a net debt position of $44 million, a $120 million swing after acquiring Power Service. We generated $66 million in cash flows from operating activities in Q2 2016, $155 million on a year-to-date basis and about $400 million over the last four quarters. Steel price deflation charges were de minimis in the period. Generally, raw steel prices continued to strengthen in the quarter due to the rise in input costs and dumping suits which have or may restrict imports from certain countries. The dumping suit on hot-rolled coil in the U.S.A. has caused ERW prices to rise late in the quarter, even though they were down sequentially and the pipe mills still have little demand. Seamless pipe mills also announced price increases, but demand remains very weak. Distributor prices as reported by Spears were flat for domestic ERW pipe and up slightly for imported ERW pipe while seamless pricing was flat for import to slightly down for domestic. In summary, prices from the pipe manufacturers are on the rise, while pricing from distribution is still weak due to oversupply. Pricing for non-tubular steel related products remains flat to weak due to low demand. Diving deeper into the quarter, one month of our recent Power Service acquisition added a total of about $7 million incremental revenue in Q2 2016 in the U.S. Enabling the U.S. to handily outperform a sequential 24% rig count decline, as exhibited by revenue per operating rig gains in the quarter, was absolute sequential revenue growth in our midstream and gas utility markets. Sequential revenue increases in the U.S. markets were primarily driven by a continued ramp up from ETC DAPL, transmission projects in the Southwest, the implementation of contract awards with two gas utilities in the Northeast, an ongoing turnaround in the Northwest and increased service rig activity. Midstream pipe activity remains limited due to a general lack of demand. Pipe competition continues to be intense as some distributors are struggling to survive this depressed market and are working aggressively to reduce their inventories to generate cash. Inquiry levels for large pipe orders have been relatively strong as of late, but those have yet to translate into increased orders, as projects continue to be delayed until the second half of the year or canceled altogether. There is a push by some customers away from domestic line pipe towards lower cost import options, putting further pressure on margins and working capital should these efforts materialize. This trend is expanding beyond pipe to include other products where customers historically demonstrated higher brand preference loyalty. In U.S. supply chain services, we continued our rollout with Hess, increased activity with OXY and our aerospace and industrial manufacturing customers, but these were not enough to offset reduced projects and turnaround activity downstream and volume declines with energy-based manufacturing customers, mainly in and around Houston. In Canada, where we're experiencing the worst downturn on record, the normal breakup season was exacerbated by fires in the oil sands regions. Bright spots in Canada were from absolute sequential revenue growth in our midstream market from several new customers and through an e-commerce solution in the drilling sector. Outside of the U.S. and Canada, the largest revenue declines came from completion of both the Wheatstone and Gladstone LNG projects and a decline of artificial lift sales in Australia, along with the continued stacking and scrapping of the offshore drilling fleet and subsequent cannibalization of associated inventories. Looking at market activity moving forward, in the U.S., decreased production translating into oil storage declines and flattening DUC inventory give us hope for recovery. However, the recent pull back in oil prices and high gasoline inventories has us remaining cautious. We've received feedback from one of our largest customers in the Permian that they plan to add a modest number of rigs this quarter and heard from a few customers in the Bakken that they would like us to begin evaluating our inventory levels to support the completion of some DUCs and from numerous customers in the Barnett, Haynesville, Fayetteville, Utica and Marcellus that they plan to increase gas activity through the end of the year. In U.S. supply chain services, we should experience growth due to the continued implementation with Hess, further activity increases with OXY and recent contract awards with downstream and industrial manufacturing customers. With our U.S. segment, we are moving from two to three revenue channels beyond energy centers and U.S. supply chain services to include U.S. process solutions which is primary composed of Odessa Pumps, Power Service, our valve actuation groups and several legacy DNOW U.S. gas measurement and pumping businesses. Previously, with the exception of Power Service, revenues from this new market channel were included in our energy center organization. With this newly created U.S. process solutions team, Odessa Pumps is scheduled to ship a large municipal pump package in the Permian and Power Service has received orders for numerous Lease Automatic Custody Transfer, or LACT units, from MarkWest and Petro-Hunt and the SCOOP in Utica, gas meter run packages for Tesoro in the Bakken, instrument air sets for Noble Energy in the Niobrara and large mainline pipeline pump packages for DCP in the Eagle Ford, all to be delivered over the next several quarters. Based on current project bookings, we believe Power Service will add $15 million to $20 million of incremental acquired revenues in Q3 2016 to our U.S. process solutions group. We had our first early win by leveraging our integrated supply chain partnerships to secure U.S. process solutions first order for water alternating gas, or WAG skids for OXY. We continue to have high customer demand for presentations, visits and audits of our Power Services operations. In addition to a modest rebound from breakup in Canada, we anticipate several project shipments of pipe, actuated valves, and fittings to multiple customers during the second half of 2016, in addition to a recovery from breakup and in the oil sands. Internationally, scheduled project shipments in the UK, Holland, Iraq, Kazakhstan, and turnarounds for Chevron in China likely won't be sufficient to offset continued declines with the offshore drilling fleet globally, a strengthening dollar, and potential fallout from volatility surrounding Brexit, the Middle East, and South America. So while we're experiencing a few green shoots, we are still in a languishing market, and we'll continue our efforts of right-sizing our business to match this environment, while ensuring we take advantage of opportunities as they arise. We are working to ensure we maintain our current position of having sufficient dry powder to fund our balance sheet to capitalize on customer demands when the market recovers, while others will be struggling to find the capital they need to support growth of inventory and receivables. Moving to capital allocation in the quarter, we generated cash by sequentially reducing inventory and receivables by $44 million and $59 million, respectively, and by having minimal capital expenditure needs of $1 million in the quarter. We are still confident that the best use of our liquidity is to fund growth in a recovery, expand organically, and pursue high value-add acquisitions. We have a pipeline of deals that we're exploring, but we will monitor world events to be sure that we are participating in the right geographies, right product lines, and at the right time. We have several international deals in our sights, but like other buyers, we are holding our breath over volatile oil prices, Middle East and South American uncertainties, and unknown Brexit implications. In the U.S., we're focused on integrating the companies we have acquired to ensure that we are getting anticipated returns. Specifically, we are focused on delivering the benefits expected from the combination of Odessa Pumps and Power Services businesses, and our one-stop-shop solution for all pumping and process needs. In closing, let me mention a quote from Wayne Gretzky that has been used often over the years: "Skate to where the puck is going to be, not where it has been." So while we are managing our business to the current realities and are proud of the gains our employees have made, we are also preparing for the future and where we see DNOW in 10 years. The market will turn around at some point and we'll be ready to take advantage of it when it does. Now let me turn the call over to Dan to review the financials. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Robert. We were spun off more than two years ago and I continue to be proud of the efforts of our wonderful workforce, as we've created a standalone, world-class provider of products and solutions to energy and industrial markets. While most of this time has been in the middle of one of the worst downturns in our industry, I continue to be impressed by the resilience of our people. I am thankful for the dedication and hard work. They make me proud, as 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 stakeholders. Robert discussed our business, and I'll say more about our financials. NOW Inc. reported a net loss of $44 million, or $0.40 per fully diluted share on a U.S. GAAP basis, for the second quarter of 2016 on $501 million in revenues. This compares with a net loss of $63 million, or $0.59 per fully diluted share, on $548 million of revenue in the first quarter of this year. When looking at the year-ago quarter, we had a net loss of $19 million, or $0.18 per fully diluted share on revenue of $715 million for the second quarter of 2015. The second quarter 2016 results included $3 million in acquisition-related and severance charge, and a net $3 million after-tax benefit relative to a deferred tax asset valuation allowance release. Gross margin was 16.6% in Q2, compared with 15.9% in the first quarter of 2016. The company generated an operating loss of $57 million in Q2 compared with a loss of $65 million in Q1. Second quarter EBITDA excluding other costs was a loss of $42 million. Looking at operating results for our three geographic segments, revenue in the United States was $337 million in the quarter ended June 30, 2016, down 6% from Q1, but less than the 24% sequential decline in the U.S. rig count. Q2 revenue in the U.S. was down 32% from the year-ago quarter, with the decline being less than the 54% fall in the year-ago U.S. rig count, as acquisition revenue improved our position. Reduced customer spending certainly contributed to these revenue declines. First quarter operating profit in the U.S. was a loss of $44 million, compared with a $59 million loss in the first quarter of 2016 and a loss of $23 million in Q2 2015, reflecting this reduced volume. In Canada, second quarter revenue decreased 13% sequentially to $55 million, and down 38% from Q2 2015, reflecting the declines in the Canadian rig count and in well completions. For the three months ended June 30, 2016, Canada's operating loss was $8 million, compared with a loss of $6 million in Q1 and an operating loss of $5 million in the year-ago quarter. The increased operating loss is essentially due to a deteriorating market activity, partially offset by expense reductions. International operations generated second quarter revenue of $109 million, which was down 15% from the first quarter of 2016 and down 34% from the year-ago quarter. Additional revenue provided by acquisitions was offset by decreased international rig activity and customers focusing on using their own inventory. International operating loss for the second quarter 2016 was $5 million, down $5 million sequentially, and compares with an operating profit of $1 million for the year-ago quarter. Revenue channels in the U.S. show energy centers at 53%, supply chain at 36%, and process solutions at 11%. It should be noted that process solutions has only one month of Power Service revenue in these numbers. Continuing on our income statement, warehousing, selling and administrative expenses were $140 million in Q2, down $12 million from Q1. These costs include branch and distribution center expenses, as well as corporate costs. Robert covered this in his comments. The effective tax rate for Q2 2016 was 26.3%. Our effective tax rate was primarily impacted by the deferred tax liability created by certain Power Service intangible assets, triggering a reduction in our deferred tax asset valuation allowance. Turning to the balance sheet, NOW Inc. had working capital of approximately $800 million at June 30, 2016, which was 40% of Q2 annualized sales, 33% when cash is excluded. We still strive to get to 25% again. Accounts receivable fell another $59 million in Q2, ending the quarter at $354 million. In the last six quarters, we reduced AR almost $500 million, despite adding AR from our acquisitions. We continue to be challenged by bankruptcies in our energy space, with more than 80 oil and gas related bankruptcies since early 2015. Inventory was $589 million at the end of Q2, a reduction of $44 million from Q1. We have slowed the inventory replenishment process and have reduced inventory $360 million since the start of last year, despite increased inventory from our acquisitions. Our current day sales outstanding were 64 days, down from 69 days in Q1 and an improvement over the 80 plus days a year ago. And we continue to work on improving these results to closer to the 60 day range and even lower. Inventory turns were 2.8 times. Days payable outstanding were 45 days. Our cash totaled $136 million at June 30, 2016 with some $100 million located outside the U.S., almost half of this being in Canada. We ended the quarter with $180 million borrowed on our credit facility, as we financed the acquisition of Power Service. Our borrowing cost on this debt average is less than 3%. So at June 30, 2016 we had a net debt position of $44 million. Capital expenditures during Q2 was approximately $1 million. Free cash flow for the second quarter was $65 million and totaled $153 million for the first half of this year. Our worldwide market continues to be challenging in 2016. 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, strong financial resources and we are prepared for whatever the future brings. With that, Jason, let's open it up to questions.

Thank you. We will now begin the question-and-answer session. And our first question comes from Walter Liptak from Seaport Global. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Walter. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Hi, Walter.

Hi. Thanks. Good morning, guys. I want to ask, in – Robert, in your prepared remarks, you called out how much cost has come out since the beginning of the downturn in oil prices. I wonder if you could just review that. I didn't catch the number. Robert R. Workman - President, Chief Executive Officer & Director: Well, we've got it to $5 million to $7 million for Q2. Are you talking about the entire period, or...

No. I'm talking about all in, the big bucket. Robert R. Workman - President, Chief Executive Officer & Director: It's $230 million – less acquisitions, it's $230 million.

$230 million has come out? Robert R. Workman - President, Chief Executive Officer & Director: Correct.

Right. And then how much more do you think is going to be coming out? If the markets are bottoming and maybe they are bottoming, how much more do you think you're going to add to that $230 million over the next year? Robert R. Workman - President, Chief Executive Officer & Director: Well, we're going to have increases in expenses with a full quarter of Power Service. We're not going to have the recurrence, we don't believe, of the fringe benefit credit and we're going to have further expense reductions in Q3, assuming we don't have some surprise growth in the market. So all that netted together, we expect to grow expenses from $140 million to around $145 million in Q3.

Okay. Okay. All right. Great. And then of that $230 million, I wonder if you could just bucket it for us into branch closings or severance packages, if it's meaningful to do that? And I guess what I'm trying to get at is how much of the costs – are there any of that $230 million that comes back at some point over the next year? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. I don't have it all broken out of those buckets, but yes, if the market comes back, we will need to increase our expenses. I mean we're cutting expenses to match revenue as fast as we can, so obviously, when revenue comes back you'll need to grow some expenses. But in this business, as your revenue is falling, it's impossible to cut as quick as the revenue drops and the reverse is true in recovery. We have a hard time having expense growth match revenue growth when the market comes back. So you'll see the same high flow-throughs, both decremental and incremental happen in a downturn and an upturn.

Okay. All right. Great. And then if I could just ask on the trends that you're seeing, it sounded kind of mixed with some new wins, maybe some new projects, DUCs that might start getting completed. I mean how do you see the back half progressing? Do you think you put in the bottom for your revenue in the second quarter and you'll see a sequential up from here? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So, since activity increased, oil has dropped again pretty considerably. So if the drop in oil doesn't have our customers rethinking all of the feedback and activity changes we experienced in the last 30 days, we should have a recovery in revenue in Q3 based on whatever rig count assumptions you want to make for the quarter. But we've been through this before last year and June 2014 when everybody thought the market was recovering and then oil dropped and everybody retracted. So what'll happen this month and next is anyone's best guess.

Okay. All right. Great. Thank you, guys. Robert R. Workman - President, Chief Executive Officer & Director: Thanks, Walt. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Thanks, Walt.

Thank you. And our next question comes from Ryan Cieslak from KeyBanc Capital Markets. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Ryan.

Hey. Good morning, guys. Robert, I wanted to get a sense of maybe how you're thinking about working capital into the back half of this year if we do see this recovery maybe sustain. You made some comments in your prepared remarks about managing that. I'd just be curious to know how you may be thinking about inventory, the ARs going into the back half of this year. Robert R. Workman - President, Chief Executive Officer & Director: We continue to believe, Ryan, that we'll get back to our high 50s, around 60 DSOs regardless of what the market does and that we'll get our inventory turns back in the 3.5 to 4 turn range. So whether revenue's falling or growing, we still anticipate that to occur. It will happen quicker obviously if we have a revenue recovery, just simply based on the way the calculation works.

So I mean it still sounds like working capital should be a tailwind for you guys into the back half and then maybe as you get into next year, again all depending on the trajectory of sales next year when you start to see that reverse. Is that a fair statement? Robert R. Workman - President, Chief Executive Officer & Director: No, I think we'll get our business in the 25% working capital percent of revenue range. If the market doesn't recover the second half of the year, we likely will continue to produce cash. If we have a recovery, we might become a consumer of cash. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: But it's important to note, Ryan, that the low-hanging fruit on our cash, we need ladders now to get at it because we've had great success on cash, $150 million this year and $3 million something (32:35) last year, but it's harder and harder, and it'd be difficult to get a whole lot more cash out of this now. And if anything if the market turns, as Robert says, it'll be taking cash. So I'd be careful you're not going to model the first half in the second half because the cash is getting harder to reach this second half of the year.

Okay. That's a good color. I appreciate it. And then on CapEx, just maybe thinking about into next year as well, I know it's early, but post the Power Services acquisition, and maybe you'll give us some more color on this next week at the Analyst Day, but how to think about maybe CapEx requirements for you guys into next year following some M&A that you guys had recently done? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So without including the Power Service acquisition, our CapEx should be in the $5 million to $10 million range in this kind of market environment. And Power Service probably has a similar CapEx demand for their business. It's a little more capital-intensive. So that puts us in the $10 million to $20 million range. I know that's a big range but it really depends on what the market's doing at the time. So still that's a really low CapEx number. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: That's right. It's a low CapEx.

Okay. And then, Robert, just maybe thinking about – I know it's anyone's guess on how, where oil prices go from here following the pull-back, but what are your customers saying? Maybe just some anecdotes of what they're saying following the pull-back here. Does it feel like – did they feel like even that this is maybe just a short-term pull-back and they're going to continue to maybe increase the order activity? I just would be curious to know just what you're hearing in the channel right now. Robert R. Workman - President, Chief Executive Officer & Director: It hasn't changed. The consistency isn't different than what I read in my comments where they're looking a little more promising with respect to especially the gassy areas as well as, DUCs are starting to be completed right now at the same rate we're drilling. They're not going through the DUC inventory, but they're at least keeping it current. Because I think the DUC inventory currently, based on the reports I've read, and this month stand similar to where it was in January. So it's not super exciting news, but people seem to be positive. I don't think anyone has rethought their plans based on what oil has done in the last seven days yet.

Got you. Okay. And then the last one for me is just a housekeeping one. Dan, with regard to depreciation and amortization going forward for you guys, how do we think about that following the Power Services acquisition? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: I think we'll have a little increase because over time, they tend to have more CapEx than we would have here, so I'd be raising it modestly, but nothing significant.

Okay. Thanks guys. I'll get back in the queue. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

Thank you. And our next question comes from Matt Duncan from Stephens. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Matt.

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

Good, Robert. Thanks. So just sort of back on business trends. I mean one of the things I think we all need to try and get our heads around is how quickly after rig counts started to go up, did you guys see the day-to-day business change? Was it almost in lockstep? Robert R. Workman - President, Chief Executive Officer & Director: Yeah, it was – I think lockstep would be a proper answer, since it was really days. Because, like before the rigs even go to work and get on a well pad, our branches are getting demands to bring material out so they can get them refurbished and re-inventoried. So we fill it even before the rig starts drilling. And then it'll grow as the process continues, because then we get into the tank battery process. So we fill some of it at the beginning, the majority of it will fill after the completion job, when the tank battery gets built.

Okay. And so the math on revenue per active worldwide rig probably is going to improve a little bit in that period where DUCs are being completed to a large degree? Would that be the right way to think about it? And then, sort of along the same vein, you saw a sequential increase in that metric. What do you think drove that? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So I think the sequential increase we saw in the metric came from a couple of things. One is, people are completing more wells now than they were. So that's what, hence, the reason that DUC count is flat and no longer growing. They're not burning through inventory, but they're at least keeping up with the drilling activity, so that helped. We had some share gains. I mentioned a few of them in the call, with Hess and some others, that's growing revenue inconsistent with rig count, so I expect that's what drove it. And there's like five or six or seven scenarios you can think of, what would happen in a recovery. In this scenario where operators, customers choose to complete DUCs before they put rigs back to work, yes, you could see an increase in revenue per rig. But if they bring rigs on at the same time they're working through their inventory, it won't be nearly as drastic.

Okay. That makes a lot of sense. And so, with the pull-back in oil prices so far, I mean, it's really I guess been falling for the better part of over a month now. I guess the last week has really been where we've seen the biggest fall, but it sounds like you're not really seeing your customers peel back on the things they had indicated they might do in the back half of the year as yet. Is that fair? Robert R. Workman - President, Chief Executive Officer & Director: Not as yet. I haven't seen any rig count reductions where they put them back to work and then changed their mind, and we haven't seen a big uptick in DUCs. But we wouldn't expect to, because customers that plan to complete DUCs that they would say we're going to start working through our inventory, the first thing they have to do is the completion job. And so that takes four weeks, five weeks, six weeks, so we'd expect a delay there.

Okay. All right. And then, Dan, just a couple of housekeeping things for you. First of all, back to the D&A question. Yeah, I get that there's going to be a CapEx number that's higher at Power Service, but there's also going to be a big jump in amortization of intangibles expense related to the deal. So what is the annual impact of that item? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: I don't know that number. Dave, do you know what that number might be on the... David A. Cherechinsky - Chief Accounting Officer, VP & Controller: Well, the annual impact is probably in the $5 million plus range of additional amortization. I don't have that number handy, but it's probably in that league.

Okay. That helps. And then, Dan, just on the breakdown of revenue... David A. Cherechinsky - Chief Accounting Officer, VP & Controller: $3 million to $5 million, Matt. Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: What's that, Dave? David A. Cherechinsky - Chief Accounting Officer, VP & Controller: $3 million to $5 million is probably a good guess on that.

Okay. Thanks. And then, Dan, just on the revenue breakdown, energy branches, process solutions, and supply chain, can you give us that, both for the total company and then for the U.S. segment? Daniel L. Molinaro - Chief Financial Officer & Senior Vice President: Well all we have, Matt, is U.S., 53% energy, 36% supply chain and 11% for process solutions. That's a U.S. cut only. We haven't cut it for the total yet. Robert R. Workman - President, Chief Executive Officer & Director: It's easy math, though.

Okay. All right, guys. Thanks. I'll hop back in queue. Robert R. Workman - President, Chief Executive Officer & Director: Thanks, Matt.

Thank you. Our next question comes from James West from Evercore ISI. Robert R. Workman - President, Chief Executive Officer & Director: Hey, James.

Hey. Good morning, guys. Robert R. Workman - President, Chief Executive Officer & Director: Good morning.

Robert, I'm curious, this time last year, when we talked about the rig count and we stood up 11, 12, 13 rigs back in June/July of last year, it seemed like it was kind of a herculean task for the industry to do that, particularly just getting supplies out to the field. Now, that was of course a different market environment (40:14) we had been in a collapsing rig count, but now (40:17) kind of bottomed in May and now we've stood up 50 (40:24) or so rigs. Could you describe kind of how that process has gone for you guys so far? Are you adequately staffed? Do you have enough inventory levels? And kind of, has there been any bottlenecks yet occurring in your system? Robert R. Workman - President, Chief Executive Officer & Director: We had more bottlenecks last year when that happened than we have currently, and the simple answer is, the inventory was the biggest issue last year, because we had a lot more rigs working. Now we have a lot less rigs working, so there's a lot more drilling inventory surplus in our system, so we can move that to our drilling centers and so they have more availability. As far as labor goes, it's not going to be as big a issue for our firm as it will for some others, because we kept all of our highly skilled staff that understand the products and their application, and really we're just bringing in warehousemen and delivery drivers and things of that nature, so that's a little easier to find in the market than other positions.

Makes sense. And then, as we think about, let's just – if we assume that my forecast, or our firm's forecast are correct and we're at 50-plus (41:32) sites year end, then we'll looking at a much better environment next year of E&P spending growth, 20% plus higher. What do you think you need to do with your inventory levels to support that type of market environment, especially considering that rigs these days, each rig going back to work is much more completion heavy than it once was? Robert R. Workman - President, Chief Executive Officer & Director: Yeah, so we have a full turn of inventory in the system, still too much. So we've got a pad there to help us with the beginning portion of the inventory demand. We also have most of our suppliers right now who are severely depressed on shipments with really low lead times, so that will also help. What we'll do is we'll keep an eye on lead times and as we burn through our excess inventory and their lead times start to grow, we'll then need to start ordering more inventory so that we have it on time to support the reactivation of those rigs.

Okay. Got it. Do you have a dollar figure in mind or a percent of revenue in mind that we could use? Robert R. Workman - President, Chief Executive Officer & Director: Well, yeah, I would say once we get to four turns of inventory on whatever rig count you're forecasting times our revenue per rig, that's when you would see us start to purchase more from our suppliers. It really depends on how many rigs are going back to work as to answer that question.

Okay. Got you. All right. Thanks, Robert.

Thank you. And our next question comes from Sean Meakim from JPMorgan. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Sean.

Good morning. I was hoping you could maybe talk a little bit about what you think incrementals could look like going forward. So I think at the EBITDA line, historically, we've thought about it, it's kind of a – this business as a 10% to 15% incremental business, but given how low your margins are going to trough this cycle, should we be expecting potentially higher incrementals initially and then reverting to something more traditional over time? Just curious how you think your incrementals could play out in the next cycle. Robert R. Workman - President, Chief Executive Officer & Director: Well this business, on the incrementals and decrementals, is highly dependent on the severity of a decline or the severity of an incline. So the stronger the recovery or the stronger the decline, the higher the decremental/incrementals are. So I would expect if we have a robust recovery, that our flow-throughs to EBITDA would be in the mid to high teens, and if it's really strong it could even touch 20% for a quarter or two before it normalizes. So if it's just very, very modest improvement, I mean 10 rigs here and 10 rigs there a quarter, it'll be in the low double-digits.

Got it. Okay. That's really helpful to frame it out. So then I was also hoping to touch on Power Service. You highlighted $7 million of revenue coming in in June. Does that initial – I was hoping to get a little bit more color on what that $7 million represents. Or thinking about relative to what that business generated in 2014, does that imply it's underperformed the rig count perhaps or underperformed kind of your broader business in the trough? Just trying to get a better sense of how that looks or what that $7 million really means going forward for the business I think would be really helpful. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So they did $7 million in the quarter, and then I commented that they'll probably do an additional $20 million in Q3. So that'd be having them at a run rate of around $27 million right now, which is about 60% off from their peak in 2014 which is not dissimilar to many of our operations out there, they are in the same plays. They could have had a stronger month, but they're happened to adjust to public company rules, and so there's a lot of material that's sitting in their yard that they had and they couldn't recognize revenue for because it was in our possession and it's completed goods. So we'll flush that out and work that out as they adapt to a different accounting treatment for material that's on our property.

Okay. Great. Thanks, Robert.

Thank you. And our next question comes from Andrew Buscaglia from Credit Suisse. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Andrew. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker): Hey, guys. Congrats on a pretty good quarter there. Robert R. Workman - President, Chief Executive Officer & Director: Thank you. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker): So can you talk a little bit more on, you touched on M&A, I just want to dig into kind of where the priorities at this point. I know you said internationally you're looking, I'd be curious to think how you're thinking about that given some of the increased risks, post-Brexit with FX and just generally difficult markets over there. Robert R. Workman - President, Chief Executive Officer & Director: Yeah, no doubt about it. We have a still robust pipeline of opportunities, some similar in size to the largest one we've done so far like MacLean and Power Service, but we are a lot more cautious right now simply because we want to see how these different challenges internationally play out. I'd hate to put our toe in the water and make an assumption and end up not being accurate and then we end up having issues with an acquisition. So we're continuing the relationships, we're continuing the evaluations, the communications, but kind of in a pause a little bit to see how these different international challenges turn out. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker): Okay. All right. That's helpful, I guess. And then just looking at, I know it's small right now, but Canada seemed to come in line with, at least what I was thinking, for the top line, but I thought that the operating income line was a little bit lighter than I would have expected. What's going on with their – going on that segment and do you see these cost savings or anything helping that line item going forward? Robert R. Workman - President, Chief Executive Officer & Director: Yeah. So I've been in here 25 years, I've never seen a market like this in Canada. So it's just a horrible, horrible market right now. I mean, it feels like we've been in breakup for six quarters in a row. They're doing the best they can in preparing and maintaining our infrastructure so that we can take share when they finally have a recovery, and they are cutting costs. They should have a recovery in Q3 for sure. I'd be surprised if they didn't. But yeah, it's just a challenging, challenging, challenging environment. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker): Yeah. Okay. Understood. All right. That's all I've got. Thank you. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

Thank you. Our next question comes from Joseph Gibney from Capital One. Robert R. Workman - President, Chief Executive Officer & Director: Hey, Joseph.

Hey. How are you guys doing? Just a quick clarification. Just on the project work in midstream and gas utilities that flowed through on the U.S. this quarter, you rattled off a host of projects here, obviously, some of which are ongoing with ETC and a couple gas utilities contracts starting up. Just curious, is any of that bucket of work that aided 2Q just sort of more episodic and dropping off as we think about the turn into 3Q there from a U.S. revenue perspective? Robert R. Workman - President, Chief Executive Officer & Director: Well, most of the positives that came from Q2 in those areas were recent contract awards, so we expect those to continue going forward, Q3 and beyond. Fortunately, those new contracts were strong enough to offset just seasonal declines with most of our other customers in those markets.

Okay. That's helpful. And then just one last one from me; I know this is always a moving piece depending on where we are in broader international activity. But just, I'm trying to get a sense of maybe in 2Q how much exposure you had from a revenue, percent of revenue basis on offshore. I know it varies a lot and you had a couple other moving pieces, obviously, what's happening in Australia, but if you could characterize that, that'd be helpful as we just try to think about what's going on, on contracted floater count into the back half of this year. Robert R. Workman - President, Chief Executive Officer & Director: Yeah. If I were to describe the different customer segments that are negatively impacting our revenue line, whether that's operators or land drillers or offshore contractors. Offshore contractors are definitely in the top of the list. It's not much of our business in Canada. We do a little bit off Nova Scotia and New Brunswick, but not much as a percent of the whole. And our Gulf of Mexico offshore business is low single-digits percent of the entire U.S., but when you get to our International segment, that's different. That's a big part of our business is offshore market A (49:57), and the North Sea and on Asia, off Australia, Middle East. We have a lot of offshore exposure. So it continues to not only hurt us from a perspective that customers are no longer buying because their rigs not working, but those rigs that are not working are supplying the other rigs that are working. So I don't know the percent total now, but in 2014, I would estimate that 50% of our international revenue was probably offshore oriented.

Okay. That's helpful. I appreciate it, guys. I'll turn it back. Robert R. Workman - President, Chief Executive Officer & Director: Thank you.

Thank you. And we have no further questions. I will now turn the call back to President and CEO, Robert Workman 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 third quarter 2016 results. Thanks.

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