Dnow Inc. (DNOW) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter Full Year 2017 Earnings Conference Call. My name is Silvia 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. [Operator Instructions] I will now turn the call over to Chief Accounting Officer, Dave Cherechinsky. Mr. Cherechinsky you may begin.

Thank you, Silvia, and welcome, everyone, to the NOW, Inc. fourth quarter and full year 2017 earnings conference call. We appreciate you joining us this morning, and thank you for your interest in NOW, Inc. With me today are Robert Workman, President and Chief Executive Officer of NOW, Inc.; and Dan Molinaro, Senior Vice President and Chief Financial 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 during our conversation this morning. Before we begin this discussion on NOW, Inc’s financial results for the fourth quarter and full year 2017, please note that some of the statements we make during this call may contain forecasts, projections and estimates, including, but not limited to, comments about our outlook for the company’s business. These are forward-looking statements within the meaning of the U.S. Federal Securities Laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q that NOW, Inc. has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information, as well as supplemental financial and operating information, may be found within our press release on our Investor Relations website at ir.distributionnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by U.S. GAAP, you’ll note that we also disclosed various non-GAAP financial measures, including EBITDA excluding other costs, net loss excluding other costs, and diluted loss per share excluding other costs. Each excludes the impact of certain other costs and, therefore, has not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our press release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the quarter. A replay of today’s call will be available on the site for the next 30 days. We plan to file our 2017 Form 10-Q today and it will also be available on our website. Later on, this call, Dan will discuss our financial performance and we will then answer your questions. But first, let me turn the call over to Robert.

Thanks, Dave. Before we get into the business, I want to touch on an announcement we made in November. Effective this Friday, our Chief Financial Officer Dan Molinaro will pass the baton to Dave Cherechinsky, our current Chief Accounting Officer. I want to thank Dan for his many contributions during his leadership as CFO, he has been instrumental and all that is DNOW and without him we would not be here that what we are today. And I’m comforted in the fact that Dan will remain an office away as an Executive Vice President and will continue to be a valuable member of our executive team, thanks, Dan. Moving on to the business, we believe the prolonged oath of market rebalancing is complete, while we expect volatility we think that the current trajectory is positive and presents great opportunities for DNOW as we enter 2018 very much stronger more agile organization. We continue to focus on both growth and efficiency in 2017 we added over $0.5 billion in revenue while reducing cost and this uneven recovery were operating on shifting tectonic plates in areas where opportunities are abundant and resources and products are scarce and other areas where the inverse is true. Despite projections for growth we expect to generate cash in 2018 by improving on working capital deployment and generating positive earnings. I’m excited to highlight a few key takeaways from the year. In 2017, we delivered strong year-over-year growth, a reflection of DNOW’s ability to capitalize on the overall energy recovery while reducing cost. Key to our success has been the progress made in executing against our strategy to optimize our operations, drop overall margin expansion, deliver growth and maintain a disciplined approach to our capital allocation. We’re optimistic heading into 2018 and are positioned to take advantage of the continued market upcycle and are confident that our business plan and strategy will allow us to do so. We remain committed to acquiring the right businesses that made our defined M&A criteria and will deliver significant value for DNOW and our shareholders. At this stage of cycle, we must also focus our efforts and capital to support organic growth. Looking at our financial highlights we’re very pleased with our ability to drive a strong year-over-year 4Q growth across all three of our operating segments. We grew revenue by 541 million in 2017; revenue for the quarter was 669 million up 24% year-over-year. On a sequential basis 4Q 2017 revenues were down 4% even though revenue per billing date was up modestly, this decline was driven by 5% fewer billing days whether impacts, declining rig counts and customer budget exhaustion in the quarter. While we're able to generate sequential revenue growth with oil and gas companies despite these factors this was offset by seasonal declines in mid-stream and downstream in the U.S. reduced customer activity in Canada. For the quarter we reported a GAAP net loss of 3 million or net income excluding other cost of 1 million. Earnings per share for the quarter was a loss to $0.03 or earnings per share excluding other cost of a penny. 4Q EBITDA excluding other costs was 13 million the year-over-year improvement of 44 million, 10 million of which is attributable to a gain on sale of the property. Gross margin was 19.1% up 270 basis points year-over-year a reflection of our drive to maximize product margins. In 2017 we added a 156 million in gross margins generating a favourable shift to positive earnings. We also added 171 million to EBITDA excluding other cost compared to 2016. This represents 32% incrementals for the year and a 19% gross margin environment which signifies a solid financial recovery for DNOW positioning us to capitalize on expected further market expansion in 2018. We maintained a healthy balance sheet ending the year with a net debt to cash position of 64 million. Working capital excluding cash as a percent of revenue ended the year at 23.8% in the range of our expectations. Now let's take a look at the progress we’ve made in executing against our strategy, growing profitability across the organization is a top priority, globally we continue to improve our operations cost structure with an eye on tightly managed expenses, we continue to invest in specific shale plays and businesses that are active and to minimize exposure in less active areas. For 2017, while we closed 29 branches we added locations and headcount and active areas like the Permian and Rockies. To drive gross margin improvement, we're pushing pricing initiatives in the field through the increased use of technology and are seeing acceptance there. Our Omni channel strategy provides our customers with the ability to acquire thousands of products from any one of our 285 locations, our regional distribution centres or by using our e-commerce system. We're experiencing revenue growth and margin improvement from investments in our e-commerce channel and system. Our PVS and customer specific apps punch-out catalogue and B2B activity all increased in 2017. Severance expenses increased in the quarter to 2 million as we extracted cost from underperforming locations and closed non-branches. We also remain committed to optimizing our operations to deliver high value add product lines and solutions for our customers. Some of our initiatives, milestones and achievements exploring new supplier partnership or new ways to work with exiting suppliers as this is an important part of our strategy and we've made a good progress here. We continue to see benefits from our new strategic relationships with key manufactures including Forum's Global Tubing and Badger Meter as well as long term suppliers like Cameron, Kimray and Benteler Steel & Tube, whom we have distributed for years. As an example, our business with select new or expanded lines, Global Tubing, Kimray and Badger Meter alone grew at a much greater rate than the rest of the business in 2017. As we indicated last quarter, we introduced a beta business mall concept for one of our US energy centre regions to allow for maximum customer reach at the least possible cost. These footprint changes help with incremental and fee improvement to DNOW. We’re encouraged by the results we have seen where one team received a 4Q bonus for the first in many quarters because of the changes made and we are reviewing other areas to replicate the success. Additionally, DNOW has taken direct steps to further our focus on new customer business development and market share growth within our current customer base. We have invested in technology to support our sales teams, identified new customer target groups and hired many additional sales team members to support and generate future growth. We also inserted resources internationally to maximize our strategic positioning on longer-term global projects, tenders and awards. Moving on to growth through acquisitions, effectively integrating the 12 acquisitions we’ve completed since the downturn began in Australia, Europe and North America remains a top focus for DNOW. It is imperative that we continue to maximize synergies and leverage market opportunities from these businesses. We’ve made meaningful progress through the end of 2017 and I’d like to highlight a few examples. At our profit solutions business, we have made great strides integrating Odessa Pumps and Power Service. We are leveraging our combined capabilities to deliver on cross selling opportunities with these businesses. For example, both companies are now stocking NOV multiplex pumps and Schlumberger REDA pumps which allows us to leverage inventory and offer customers a value-added solution. As evidence of this benefit in 4Q, we’ve recently received orders from a major E&P customer for LACT units with NOV multiplex pumps on the discharge. As part of the ongoing integration with Mclain Electrical we announced the creation of Latin Energy distribution brand in the United Kingdom which gives our industrial and street lighting division its own market identity and focus. In addition, the JT Day Australia brand is now operating under Mclain Electrical. In 2017, we integrated the Heritage Wilson Supply, mill tool and safety business that targeted manufacturing customers into the acquired machine tool and supply business in early 2017. This allowed us to combine our sales and operations teams and reduce back office expenses. We remain intensely focused on stocking levels to ensure working capital as a percent of revenue is meeting expectations in each area and increasing term rates. Looking ahead, we will continue to focus on growth and efficiencies as well as further advancing our integrations. Specific to integrations, among the items that we expect to complete from 2018 include within the US process solutions business, Odessa Pumps and Power Service are further integrating our business development and sales teams to cross train on water injection pump packages, LACT units and ASME vessels while also combining forces for our midstream initiative. For Mclain's, we still expect additional integration benefits and under a new regional leadership structure, we will be working as one to utilize business locations and category strengths to increase opportunities. In addition, we will be focused on supporting Mclain's product lines from all DNOW European locations. Regarding the market, 2017 US rigs paid at 953 in July. After four months of rig counts declining by total of 42 in the US, rigs rebounded somewhat in December adding 19 rigs ending the year at 930 rigs at an average of 875 rigs for the year. US rigs were up to 975 at February 9. Sequentially from 3Q to 4Q, Canada rigs declined for the third time in 10 years with the two prior jobs occurring during the severe downturns of 2008 and 2015. Completions have grown for five consecutive months through December although DUC counts continue to climb and just like rig count, the rebounding crude process and recent activity levels are pointing towards a positive outlook for this year. 4Q '17 completions equal to highest quarterly count since 1Q '15. In the second half of 2017, completions outnumbered wells drilled in the Appalachia, Bakken, Haynesville, and Niobrara plays. With the acquisitions in our U.S. Process Solutions group, we anticipate further gains once the service pump companies can deploy sufficient frac horse power to stop growth in the DUC count and begin working through the inventory of wells waiting in line to be completed. Overall U.S. 4Q revenues were up 29% year-over-year though sequentially down 4%, largely in line with U.S. rig count change and the reduction in billing days. For the U.S. segment 4Q operating margins experienced strong sequential decrementals as WSA cost declined while revenues improved. Our U.S. energy centre business outperformed the U.S. overall with a 4Q year-over-year improvement of 37% but had a steeper 9% sequential decline 4Q versus 3Q on the back of seasonality, negative weather impacts in the Permian and Rockies delayed shipments due to congestion at the port of Houston and choppy mid-stream projects that didn’t occur in the mid and north east. Softness from these challenges was were partially offset in the North East by the implementation of a recently awarded mid-stream launch and receiver contract and continued strong pipe shipments to gas utility customers. Looking forward, we expect continued growth for Forum, Global Tubing in several mid-stream and gas utility projects across may U.S. basins that were delayed from 4Q that will help offset slow activity rebound with customers who are yet to finalize their budgets. We’ve seen an increasing number of mid-stream projects that should materialize in 2018 and beyond and expect more projects to be announced in the coming quarters. With trade suits and potential sanctions in the mix the supply chain is less certain. With inventory on hand and strong supplier relationships this could play at a near term benefit for DNOW. In 4Q the U.S. supply chain business grew 15% year-over-year and 3% sequentially. The sequential increase was due to growth with our energy customers partially offset by downstream and industrial customers, which saw expected turnarounds pushed from 4Q into early 2018. Supply chain energy customers grew sequentially overcoming reduced billable days, weather and holidays and a transition of a customer's assets with pipeline projects executed in the Eagle ford. This growth was driven by strong up stream facilities and mid-stream project work with Marathon, Oxy and Devon that offset seasonal softness with Hess. Despite turnaround delays that were pushed to the first half of 2018 downstream and industrial activity experienced a large amount of bid activity in 4Q and we secured two new customers which should bode well for future quarters. For the machine tools supply business there is sales increase in line with increased aircraft deliveries and increased customer manufacturing activity related to an improving oil and gas industry. With oil process steady or improving an increase in the number of billing days, normalized manufacturing schedules and a strong turn around season, we should see an improved 1Q for U.S. supply chain services business overall. The oil and gas customers and supply chain services are projecting increased drilling, completions and capital projects in 2018, so that should be a nice tail wind. We've also had some success in transitioning some of these customers to source from U.S. process solutions for pumps, process equipment, oil and gas measurement systems and controls. 4Q U.S. process solutions grew 35% year-over-year with the Permian being the largest contributor to growth. The Permian remains by far the busiest region for the solution but we are seeing increased bid request in the Rockies, Eagle Ford in DJ Basin. Going forward based on customer activity, we received in 4Q, we expect large water injection pump packages, ASME vessels and lacked units' sales in the Permian and Bakken, an increase in midstream actuated valve projects in the DJ Basin and large fluid transfer pump projects in the Bakken for one of our supply chain customers. These orders received late last year, are promising for the 20th performance of our US process solutions group. As the demand for our US process solutions products continues to increase, we will continue pushing into new areas including increasing our total valve solutions presence in the Permian Basin. While Canada’s top line grew year-over-year by 16%, revenues declined 11% sequentially in 4Q. Total 4Q well spud were down 18% sequentially, big projects related to the shutdown of tie-ins with our largest customers, stall turnarounds with our largest oil sands customer, reduced pipe activity and long lead time back order inventory drove the decline. We have several customers cease operations for the holidays earlier than normal and we saw a decrease in wells spud that began in mid-December. For the quarter, gross margin gains drove strong sequential follow-throughs. The Canadian freeze and related activity should boost revenue in 1Q sequentially as increases will likely occur in the north most likely in the Montney and Duvernay plays. Shipments with multiple customers that slip from 4Q a growing customer base or a NOV Fiberspar spoolable pipe team recently received midstream project purchase orders and a growing activity in our valve actuation and artificial lift groups all point to a strong 1Q for Canada. Similar to the US, top manufacturers are expected to allocate capacity to OCTG, this along with the Chinese OCTG, ERW and seamless line top excluded from the Canadian market may cause crossing to be more volatile which would be favourable to us. International 4Q revenues were up 12% year-over-year, 4Q operating margins were similar year-over-year. Sequentially, international top line was relatively flat as increased revenue in the CIS in both Azerbaijan and with Kazakhstan’s future growth project, electrical cable sales in China and work with wood side Chevron and Shale in Australia were offset by softness in Europe, Latin America and project completions in the Middle East. Sequentially, margins compressed is how margins projects came to close and severance cost accelerated due to the amplified cost cutting measures across the segment. Drilling outside the US is forecast to increase 5% led by improvement in Russia, China, Western Europe, Australia and parts of Africa. Growth in capital projects backlog in the UAE, Kazakhstan, Azerbaijan and Asia should boost our Middle East and CIS operations. As well recent wins in Trinidad, Brazil, Columbia and Mexico show promising signs for our Latin American operations. New artificial lift projects with several customers and a recent MRO award with Chevron for Gorgon and Wheatstone should provide a nice tailwind for Australia throughout 2018. Global offshore drilling is believed to hit an inflection point and is expected to begin a recovery. We are in discussions with many of our drilling customers and believe we are well position to benefit from these gains given our presence in this market and regions. Finally, DNOW is a large global enterprise, there is a lot working well across the organization and where it is those managers have more than enough flexibility to cross further. From our perspective the downturn is over. Our managers know that growth at high incremental given our existing sufficient infrastructure to support growth is paramount. We’re ready to invest further in high return locations and businesses, low return locations or businesses are under significant over sight and our managers understand that we will operate as if this market is the new normal and will continue sizing the business to reflect that. Our teams are operating with an understanding that substandard profit in cash remittances are absolutely consist, consistent performance measured by cash generations frugality, efficiency and yield while deepening our importance to and winning over more customers will continue to be our mantra. Now we turn it over to Dan to review the financials in more detail.

Thanks, Robert. We look back on many successes of 2017 including an impressive year-over-year 26% revenue growth while continuing to reduce housing, selling and administrative cost and increasing margins from 16% to 19%. I remain impress with our dedicated work force and I'm convinced we’re the top people in the industry. I'm grateful for the hard work, integrity and first appearance of the DNOW family. Thanks for all you do, in 2018 we will continue to concentrate on the needs of our customers while maximizing the 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 $3 million or $0.03 per fully diluted share on a U.S. GAAP basis for the fourth quarter of 2017 on $669 million in revenue. This compares with a net loss of $9 million or $0.08 per fully diluted share on $697 million of revenue in the third quarter of 2017. When looking at the year-ago quarter, we had a net loss of $71 million or $0.66 per fully diluted share on revenue of $538 million for the fourth quarter of 2016. The fourth quarter 2017 results included $3 million of after-tax charges for valuation allowances recorded against our deferred tax assets and $1 million of severance charges. After adjusting for these other costs, our fourth quarter net income was $1 million or $0.01 cent per fully diluted share both non-GAAP measures. Fourth quarter 2017 gross margin was 19.1% compared with 19.4% in 3Q 2017 and compared with 16.4% in the year-ago quarter. Operating profit was breakeven in the fourth quarter of this year a $6 million improvement from the previous quarter and an improvement of 47 million from the year ago quarter. Fourth quarter EBITDA excluding other costs, in non-GAAP measure, was $13 million, improving by $8 million sequentially while revenue decline due to seasonal factors EBITDA excluding other cost improved a counterintuitive and notable achievement. Looking at operating results for our three reportable geographic segments, revenue in the United States was $488 million in the quarter ended December 31, 2017, down 3% sequentially and up 29% over the year-ago quarter. Year-over-year improvements in the U.S. rig count coupled with a full year benefits of the mid 2016 acquisition contributed to these revenue improvements. Revenue channels in the U.S. for 4Q were 52% US energy, 32% US supply chain services and 16% US process solutions. Fourth quarter operating loss in the US was $1 million, an improvement of $9 million from the third quarter of 2017 and a $42 million improvement over the year ago quarter. The year-over-year narrowing of the US operating loss was primarily driven by increased volume, improved pricing and reduced warehousing selling and administrative expenses. In Canada fourth quarter revenue declined 11% sequentially to $85 million and was up 16% over 4Q, 2016, to essentially the Canadian rig activity coupled with the impact of the weakening US dollar. Revenue in Canada was up almost $100 million in 2017 to end the year with $356 million even the rare seasonal decline in the fourth quarter. For the three months ended December 31, 2017, Canada’s operating profits was $4 million same as 3Q, 2017 and improve $6 million over a year ago quarter reflecting growth in the period of higher margins during the year. Canada posted an operating profit on each of the four quarters in 2017, and delivered 32% operating profit flow through from 2016, 2017. International operations generated fourth quarter revenue of $96 million which was up 1% over the third quarter of 2017 and up 12% over the year ago quarter. International's operating loss was $3 million for the fourth quarter of 2017 due primarily to severance cost and lower gross margins as higher margin projects declined as a percent of sales. This compares with breakeven in the third quarter of 2017 and the operating loss of $2 million in the year ago quarter. Continuing on to the income statement, warehousing, selling and administrative expenses was $128 million in the fourth quarter a $13 million reduction sequentially partially attribute to $10 million gain on the sale of this facility. Here is a much been written about tax reform in the US and the impact going forward. The Tax Cuts and Jobs Act provided for a reduction in the US corporate income tax rate requiring that we re-measured our deferred tax balances based on the reduced tax rate, while we are in net deferred tax asset position in the US, we also have a full valuation allowance. As a result, we had to write down both the deferred tax balances and our valuation allowance resulting in a zero net P&L impact. These write downs of our deferred tax assets and valuation allowance amounted to $69 million in the fourth quarter. We also recorded a onetime $33 million charge relative to the transition tax resulting from the mandatory deemed repatriation of our unremitted foreign earnings which was fully offset by foreign tax credits and net operating losses again resulting in zero P&L impact. Our effective tax rate as calculated for GAAP purposes was essentially 0% for 2017. When we are no longer subject to evaluation allowance in the US, we expect our effective tax rate to be in the mid 20% range. Turning to the balance sheet. NOW Inc, had $637 million of working capital excluding cash at December 31, 2017, which was 23.8% of sales, remaining below our 25% target and we will continue to optimize our capital employed. Accounts receivable decrease $43 million sequentially to $423 million, the pace of bankruptcies in our energy space is using but we must continue to be diligent as we extend credit. Our current day sales outstanding was 58 days our loss levels since this spin off but there is more we can do. Yearend inventory was $590 million up 28 million over 3Q as previous month of increase activity. Inventory turns remained were 3.0 times a bit below our targeted 4.0 times. We must continue to carefully manage the inventory replenishment process as activity levels improves and supplier lead times fluctuate. Days payable outstanding were 49 days in fourth quarter '17. Cash totalled $98 million at December 31, 2017, with $81 million located outside the U.S., more than one third of that being in Canada. As I mentioned in my comments on taxes, the tax cuts and jobs act required mandatory one-time transition tax on the partition of our foreign earnings. Despite the result from deduction with the tax cost of an actual partition following the act, we have no plans for an actual repatriation at this time. We ended the quarter with $152 million borrowed under our revolving credit facility and we remain in a net debt position of $64 million when considering total company cash. Our debt to cap remained at 12% at year end and we had $429 million in availability. Our borrowing costs on the debt approximate 4% and we expect the Fed to continue to push short-term rates incrementally higher during 2018 as the attempt to spend off inflation. Our credit facility matures in April 2019 and we've begun refinancing negotiations. Capital expenditures were $1 million in the fourth quarter of this year giving its $4 million for the full year 2017, the same as in full year 2016. Showing the effects of improving business conditions and the need to support improving activity, free cash flow used in the fourth quarter was $9 million. Our worldwide market continues to be challenging as we remain closely tied to global rig count and drilling and completions expenditures. We will continue to focus on serving our customers as we rationalize expenses, concentrate on integration gains from our acquisitions and seek to maximize new opportunities. We have confidence in our strategy and our employees and in our future as we position NOW, Inc. to serve the energy and industrial markets with quality products and solutions. We are an organization with exceptional leaders, outstanding employees, solid financial resources, and we'll continue to respond to the needs of our customers. This is my final earnings call as DNOW's CFO and I've been honoured to serve this wonderful organization since our spin from NOV. The finance department will be in the capable hands of Dave Cherechinsky and most of you already know him well. I will continue to serve Robert and our board as Executive Vice President and look forward to seeing you at Investor Conferences, Shareholder Meetings and elsewhere. With that, I’ll turn it back to Robert for some concluding comments.

Thanks, Dan. At the foundation of DNOW success is the deep bench of dedicated employees. This quarter, I’d like to highlight Hank Babylon right here in Houston. Hank is a sourcing specialist and has been part of our DNOW family for 44 years. I first met Hank in the early 90s are now transferred from the Bryan, Texas branch to the Houston export group off Clinton as an expediter. We spent many days dodging bullets and worrying about whether or not our cars would still be in the parking lot at the end of the day. Hank and I have a lot in common in that we don’t give up easily, the first time Hank interviewed with National Supply, he didn’t get an offer, he couldn’t understand why and he came back and asked for another interview. The second time around he got the job and he has been with us ever since, thank goodness we didn’t make the same mistake of letting him get away a second time. Since then Hank has worked for us at 9 different locations in six different functions in other industry, organization and products inside and out. Thank you for doing what you do now Hank and thanks for giving us a second opportunity to do the right thing. Before opening up for questions, I’d like to reiterate that we are proud of the year over year growth that we drove as well as optimistic about the 2018 macro backdrop and our ability to continue to leverage that to the benefit of our shareholders and employees. Based on customer budgets previously announced, growth with our North America shale focused customers, offset slightly with only modest improvements in the international and offshore markets, revenues could improve low double-digits with the top side being mid-teens in 2018. Due to current market activities, the continued growth in our revenue per billing day and an increase in the number of billing days, we would expect sequential revenues to grow mid to high single-digits in 1Q. For these sequentially and year-over-year periods, incremental EBITDA generation on improve revenues should be in the 10% to 15% range. We’re excited about our progress against our strategy and the related initiatives in each of the businesses. And looking ahead our focus on improving operations while capitalizing on the ramp up of completions and delivering on operational and working capital efficiencies will drive continued positive earnings momentum. And with that let me turn it over to questions Salvia.

Thank you. We would now begin the question-and-answer session [Operator Instructions] And our first question comes from Matt Duncan from Stephens, Inc.

Hi. Good morning guys. So, Robert first question, you talked about this a little bit, but just on Canada it’s obviously abnormal to see sequential decline revenues there in the fourth quarter, I think the only time that’s happened before since you spun out was there in the downturn in 2015. So, is it really just sort of an abnormal market setup that drove that this year, is there anything else going on that we need to be thinking about. And do you expect to see Canada bounce back pretty nicely here in the first quarter?

Yeah. So, Canada definitely was a surprise, because they usually grow in Q4. And rig counts usually grow in Q4 and neither one of those two things happened this particular Q4. It was very odd to see how much basically the industry shutdown in December that was surprising, it usually doesn’t happen because they are winter season so they are usually active. So, budgets were exhausted, people put up projects, rigs were laid down and everybody took Christmas, a really long Christmas. So, the good news is we keep up with the Baker Hughes report thats coming back strong in 1Q, so it might just be one of those weird abnormalities the third time in 10 years that that’s happened.

Okay make sense, on the profit side of things, this is the second straight quarter you guys have had positive EBITDA but your profit levels are probably still a little bit lower than what I think the shareholders would like them to be, certainly I know they were lower than where you want them to be, so talk a little bit more about your plan to improve profit, I know you had the beta test going on, revenue growth of low double-digits are obviously going to get some nice operating leverage but, what else are you guys doing to drive profits higher are you going to take the beta test, you're running I believe in Haynesville maybe roll that out more broadly what are the plans there.

Matt this is Dave, so we're -- first of all we expect growth in years as Robert guided to, we expect depended on the rate of growth, some further price depreciation during the year but as you saw from our full year results and our year-over-year results while we’re adding hundreds of people or new customers and opportunities in the shale plays, we're shuttering locations, cancelling leases and reducing personnel as well. So, we’re continuing to right size our business or the parts of the world that have been benefited from the recovery and we're pushing price, we saw a seasonal dip in the fourth quarter, I think that puts a downward pressure on price but we expect some recovery there as well. So, our focus is growth, better pricing and making sure the organization produces on a location and business basis.

And last thing for me and then on price and sort of how you translate this all into incremental margins. What are you guys expecting from price, this time lead times have really stretched out on certain things, you talked about some of the trade issues that been going on, how much price do you expect to get this year, what does that mean for gross margin and then at the end of the day Robert, if we're talking low double-digit to mid-teen revenue growth, what type of year-over-year incremental operating margin should you get on that based on sort of everything you guys are planning for the year.

Robert talked about the incremental in the 10 to 15 range. As you know for the last several quarters, we've seen premium flow throughs for several quarters in row. We believe 10% to 15% is kind of our average normal operating arena but there is some upside on the gross margin side, we could move towards 20% depend on the rate of growth in the year. And like I said pointing our cost, while we believe 10 to 15 is right kind of guidance range we're going to be pushing hard to pierce that top level and get into the higher percentages.

But Dave if gross margin is up given up above 15% is kind what I'm hearing.

If we see meaningful gross margin depreciation yes.

Our following question comes from David Mathew from Baird.

First off can you just tell us how you feel about your revenue per U.S. or global rig in 2017 and then when you look at 2018 that 10% to 15% growth, do you think the revenue per-rig metrics go up, stay the same and why.

So its stayed roughly flat again that 1.3 million level, if the world turns out the way customers are saying it's going to turn out, right, that’s a big if, because it usually never does, but let's just play back as one of the reviews of they go down the path they say they are going to go down which will be very very modest rig adds in the US, but a ramp up of completions then it could skew that measurement to be positive.

Okay. Thank you. And then second question is on the process solutions business. If you could talk about how much traction you are gaining and selling a complete package, and I understand that everything except the tanks. Or are you having more success with say selling the pumps skids or valve solutions or LACT units than you are selling a complete turnkey package. And I don’t know if there is any metrics you can wrap around that Robert in terms of the number of turnkey tank batteries you sold in 2017 relative to kind of the partially year in 2016. Anything to help us understand the traction you’re gaining there in the PF segment?

Yeah. So, we do sell complete tank batteries in the Rocky Mountains, because that’s for that business is been forever and our goal was to expand that to other plays. What we’ve seen is at the beginning customers only ordering water injection pump packages, they’re only ordering AS semi vessels, they’re only ordering lack units to kind of gauge their comfort with our quality, our ability to deliver and so forth and so on. As we’ve gone through a year and a half of selling like 12 pieces a kit like all the exact the same pieces of kit now we’re seeing customers that order maybe two or three of the pieces. So, it’s gaining traction and we’re getting more and more kits, but we’ve only really done probably a total turnkey outside of our core markets twice so far. But that’s twice more than we did before and at least customers are ordering multiple units now as opposed to only giving us one component of the tank battery.

Our following question comes from Nathan Jones from Stifel.

I wonder if we could go back a little bit to the incremental margins and look at the WSMA side of that. If you’re looking at 2019, 2020 odd gross margins and 10% to 15% EBITDA margins with upside that was seem to imply that you are going to be adding net warehousing selling and administrative costs. Can you talk about what’s the plans out for the net cost on that side? Where costs are coming out, where they going in and how that shapes out the outlook for WSA in 2018?

We closed 29 locations in 2017, we added about 10, almost all of those were for new customers Marathon, Oxy the growing customer. And we’ve got initiative in the Permian which I believe we’ve talked in the last couple of quarters about adding a lot of sales people and operations to support growth in the Permian. So, that’s where we’re seeing to grow and where we’re seeing the reductions are in the international arena and in slower activity locations in United States and Canada that's where we're pulling the cost out. I see those WSA numbers staying fairly flattish for the year despite growth. The percentage will come down each quarter and the absolute should not grow, should be in the 140 range. So, our focus is on like Rob said efficiency, efficiency, growing the business, so WSA should be fairly flat.

If you’re forecasting or looking at WSA being fairly flat. Gross margins in the 19 to 20 range with potential upside from pricing booking gross margins higher. Are you being really conservative with this 10% to 15% % incremental margin guidance.

I mean, 20% gross margin will be achievement for us this year. It's possible and I said, if the right things happen, of we see a good growth rate that will happen, yes, there should could be something conservatives in those numbers, but we don’t know what's going to happen in the market in these coming quarters, a month ago we had $66 oil now we are seeing $59 so there is still some uncertainty there.

And if you had on the call four quarters ago, the Q4 of '16 call, that said do you think there is any chance you can get over 30% flow through in 2017, you've would not have gotten a single yes from any of us.

That’s fair I understand. And then may be on capital allocation balance sheet is in pretty good shape here. You guys could probably use some more scale given the down turn has probably taken the energy set of revenue down this cycle. What kind of assets are you looking at and what kind of expectations do you have the capital to be deployed in 2018.

We made good progress in both DSOs and turns which are the big driver but we're not to our stated goals yet, even though we're happy that we’re headed in the right direction, we still need improve inventory turns and DSO still need to come down. So, we should get more efficient and working capital as a percent of the revenue that we grow. Some things are happening in Q3 and Q4 and partially in Q1 where these lead times of 30 weeks or 35 weeks on all sorts of products by the way, will happen to trying to get ahead of that and so some of stuff is showing up that’s being planned for future deliveries and so it kind of boost up our inventory in Q4.

I was talking a little more specifically around that potential M&A.

We never forecast how many deals we're going to do or how much money we're going to spend, because that just gets you into trouble eventually because you might make some bad choice that got a just try to meet a number that you laid out there. We're not at all nervous about taking on more leverage if the right deal comes along, it just gets a little more difficult in this environment when you have a recovery going on to close the bid as spread.

Our following question comes from Sean Meakim from JPMorgan.

So just a clarification I guess in the first quarter, we heard pretty consistently from a lot of completions levered companies that weather delays in west Texas and North Dakota make to a slower start through year in January. I guess I would thought that negatively impact you now given you lose some days of sales, activity pushed to the right a bit, is that now the case or is it just on a relative basis more seasonality in the first quarter, just curious if you could give a little bit more kind of how January unfolded for you.

We got a month and a week under our belt into this quarter and so that drove our answer or our forecast of what we think sequentially is going to happen in the business. If we were experiencing significant delays in the business, I wouldn’t have thrown out there, that we could grow half single digits.

Are you saying that weather was not a significant factor for you in the first quarter.

The weather definitely did affect us in Q4, whether it was rain in west Texas or freezing in several places and you combine that with less billing days and customer budget exhaustion and the holidays and all that stuff, that’s what happened generally in Q4, but so far we are excited about where Q1's headed.

And then I guess maybe could give us a little for more specificity around the lead times that you are seeing, where are you seeing, which cost lines would you highlight and give us a sense of the relatively versus a year ago?

Yeah. When the market started beginning to recover, it was three or four quarters ago, lead times for engineered valves, for NOV multiplex pumps, Schlumberger REDA pumps, that stuff was all in that 15-week range, 18-week range or whatever, we’re seeing 30 weeks and 40 weeks on stuff, on several product lines in fact all of our businesses, all of our three segments in the US and then our global and international segments. We have a congestion in the Port of Houston that they have to figure out how a solve, it’s holding the big top orders that we have sit and waiting to be delivered and shipped the customers. So, we got all sorts of clogs going into the supply chain that we’re trying to get ahead of.

And I guess just one last follow up on that. Could you help us understand the economics of how your contracts work such that you are able to -- how are you as a distributor able to capture some of that value as things get really tight lead times push up relative to what your suppliers would benefit from?

So, it’s early too pronged approach and we’re working both. So, we have contracts with customers where we have agreed on a price for everything that they bought from us and so if they just placing orders on it and don’t asks us to bid it, the system price is based on our contract. And so, to move those margins up, we have to go renegotiate, sometimes we do on it a specific product lines and sometimes we do it in a specific geography with the customer so get them to accept the contract amendment that we can put in the system which we are doing. The other part is, lot of our customers don’t place big orders on it, on oil and gas company that buy stuff from us every day may not ask us to bid because it’s just $100 orders, $1,000 orders, $5,000 orders, but when you get into the larger orders like from the midstream market and the tank battery market, they don’t just order that material based on a pricing contract, they sent that out for bid. And that’s where our branches are starting to really surgically push price, because they’re trying to grow their margins, because the higher they grow their gross margins, the higher their EBITDA margins are which makes their quarterly bonus bigger. So, we are pushing on both fronts.

Our following question comes from Steve Barger from KeyBanc Capital Markets.

Good morning. Just want to make sure I’m thinking right about your message on 1Q. If these improving trends lead you to that sequential revenue increase will that be enough to generate positive EPS on an operating basis and a sequential increase in EBITDA?

Yes. And yes, Yes and yes.

That’s perfect. Back to the comment on skewing revenue per rig to the positive. If I look at slide seven obviously that’s already been happening over the last couple of years. Is there any specific thing that you can call out on what’s driving most of that change right now? And is that accompanied by a sustainably better mix?

Well, our revenue per rig is growing simply because we believe we’re growing our market share, okay. So, that’s just going to drive that number up. The unfair saying about that measurement is that one land rig in this measurement is the same as one drill ship. A drill ship buys a lot more than land rig. So, with the offshore market still severely depressed, I’m actually quite happy that that number keeps growing because it should really grow in some part as to feature far, far away where that offshore market comes back and then we get to add one rig and to spin with one rig and that’s going to be a big impact with that number. But when it comes to offshore market I'm not holding my breath.

And I would add Steve that if you look at rig counts, the rate of growth has obviously declined but completions are growing, so we could see bias towards higher revenue per rig, even if rigs stay flat because of the growth in completions.

To the off shore comment I did see and I think, you said the drilling would be up 10% in 2018. Does that start to translate immediately into a benefit for you in 2018, and does that say good things about what could happen in international.

Most of everything I have read about growth outside of the U.S. and Canada, on a CapEx growth, a lot of that is not offshore, now some of it is, you have seen reports out from the drillers last week get new contracts and things of that nature but don’t forget I don’t have any rigs that’s been, 140, 150 up floating rigs have been scrapped, there may be even more so far, all that inventory went through store base somewhere. So, they had a lot of inventory if they can use to support any rig additions for quite a well, I mean these rigs carry a lot of inventory. So, it's going to take a lot to burn through that material before they start ordering stuff from us.

Got it and I will just squeeze one last one, good to hear your expectations on cash generation 2018, do you have a range around what you're thinking about and is that coming more from -- is it just a positive swing in earnings or can you get some benefit from working cap.

The positive swing in earnings will of course generate cash for us in the year. The opportunity like Robert said is to rest to improve our DSOs which we made nice progress on, but they are not where they need to be and to sell a lot of that pent-up inventory we bought for projects that are beginning to materialize in first half of the year. So, there should be cash generate on that, the equation is well, how much that will be, that could be, it will be positive, it will in zero, 25 million range from the year, it depends on what happens. It depends on what happens with those critical assets.

Your following question comes from Walter Liptak from Seaport Global.

I want to ask about the pricing question that you were discussing previously, are you seeing any differential in pricing by basin, you mentioned the Permian, the Rockies are doing a little bit better, is it easier to get price pass through there and why is it lagging in some of the other ones, if that’s true.

It's always easier to push price when activity is very busy because customers become less concerned with price and more concerned with how fast you respond to project bid request, do you have the material available quickly and can you get it out to locations. So that always happens in any cycle that we're in and when the market falls apart and they really get price focused. So, having said that that means we’re not experiencing growth which is most of the gas plays except for the North East so the Haynesville, Fayetteville all that stuff is still depressed, so we are not getting much traction there, California, Alaska, those places haven't had the same spurring growth. So, I would say we're getting most traction in the Eagle Ford, the Permian, the Niobrara, the Bakken and the Marcellus.

Okay sounds good, if that’s the case with branch closing you mentioned 29 in '17 and I think that was held back by some leases and things, can you give us some idea of the kind of cost activity you’ll be doing in 2018?

You mean cost reduction activity?

Yeah. I guess how many are there some leases that are rolling off for the variable to end. Are you expecting the same number of branch closings or does that slope?

I would not expect to say number branch closings. We’ve seen a market grow, we will be continuing to close branches, but that the markets although it’s on the even recovery, we are seeing the market expand and that should limit the number of locations closed. We want to be in more places. We want to be close to our customers, what we’re working on is transitioning our locations to smaller locations, with less inventory, with more of a sales presence, so we could be close to the customers without that investment of capital and personnel.

Yeah. We have -- I don’t how many of jobs we have posted, but there is a ton of amount there for areas where we’re experiencing growth and need more help. Our goal is to continue focus on the places where that is not the case to try to maintain expenses at a reasonably flat level which will be quite a feat, if we can continue to forecast out enough to do that while we’re hiring and opening in other places.

Right. Okay, it sounds good. And then Robert, I think you mentioned in your commentary that you paid a fourth quarter bonus for the first time, which I guess would be a great accomplishment. So, the question is around what were the metrics pay down is it revenue growth I think you mentioned profitability is one of the metrics. And then what are you thinking about for the bonus accrual for 2018, because if that keeps up there will be I guess a delta in your profitability from bonus payments?

Yeah. So, the comment I made about the bonus is our branch bonus program which effects the vast majority of all the DNOW employees. Our corporate plan only effects the office here in Houston plus few others locations. So, the branches have to generate enough EBITDA margins to pay a bonus and there are all sorts of metrics involved in that and involves running your balance sheet well, because you don’t run your balance sheet well, all of the mistakes you make there end up with EBITDA which reduces your profitability and so forth and so on. So, my comment about that was, is that the area where we implemented that beta program where we haven’t substandard generation of income statement results and they did this program with reduced expenses on the outline branches and supported from the DC and increased sales presence so forth and so on. One of those branches that hasn’t had a bonus forever because they’ve never met the criteria to get a bonus at their branch actually got in the pay zone. So, which basically reinforces that switching gears to this model of reducing expenses while managing the top line is actually working.

Okay, got it. Okay. And I guess Dave just in 2018 are you thinking about our corporate bonus accruals when will we start to see that flowing to the income statement?

Yeah. Well, we expect to pay some bonuses that’s in the guidance we gave. Like Robert said, we paid based on working capital, turnover and EBITDA performance, if we get to certain levels we pay-out. But, the projections we gave were reflected....

And its funding.

We have no further questions at this time. I will now turn the call over to Robert Workman, CEO and President for closing statements.

Thanks everybody for your interest in our quarter and then interest in our company. And we look forward to speaking to you in May about our Q1 results.

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