Good morning and welcome to the First Quarter 2020 Earnings Conference. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And I will now turn the call over to Senior Vice President and Chief Financial Officer, Dave Cherechinsky. You may begin, sir.

Good morning and welcome to the NOW Inc. First Quarter 2020 Earnings Conference Call. We appreciate you joining us and thank you for your interest in NOW Inc. With me today is Dick Alario, Interim Chief Executive Officer. NOW Inc. operates primarily under the DistributionNOW and DNOW 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 financial results for the first quarter 2020, please note that some of the statements we make during this call, including the answers to your questions 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. We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. 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 maybe found within our earnings release on our 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 disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA; net income, excluding other costs; and diluted EPS, excluding other costs. Each excludes the impact of certain other costs and therefore has not been calculated in accordance with GAAP. A reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release. As of this morning, the Investor Relations section of our website contains the 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 first quarter 2020 Form 10-Q today and it will also be available on our website. Now, let me turn the call over to Dick.

Thanks, Dave. Good morning everyone and welcome. We won’t spend a lot of time in our prepared remarks today talking about the macro environment for two reasons. One, we're reporting fairly late in the quarterly earning cycle and thus, we know that everyone on the call is well apprised of what's happened. Secondly, there are a number of things we're dong are rather unique at DNOW, which even as we deal with the market difficulties, will make the company much better equipped to improve its market position, and so we think it’s more important to spend our time on those. As I speak with you today, I want to begin by thanking DistributionNOW's talented and dedicated employees for all they have done to assure the business continuity that our customers and shareholders expect. As importantly that done this while keeping DNOW's ESG goals at top of mind. We've taken the right steps to protect our employees' health and safety. Alongside that, one of the crisis business rules that I put into place as market conditions deteriorated so quickly in February is to continue to show DNOW's social responsibility as a company, and I've seen many examples of that over the last couple of months. And with regard to governance, we've included a proposal in our proxy to declassify our Board, which we're recommending. So, against the more visible and increasingly important backdrop of ESG, I'm just as proud of how our company has been able to keep our ESG focus in tact, feeding sustainability as we've made the hard decisions and taken difficult steps. As all of you know very well, the oil and gas industry is dealing with an unprecedented shockwave emanating from the COVID-19 global pandemic and the collapse in oil prices. Because we're an essential service to…

Thanks, Dick. Due to the uncertainty around global events, the COVID-19 pandemic and the associated significant reduction in oil prices, we will not be providing revenue guidance for the second quarter or for the full year 2020. For the first quarter of 2020, we generated $604 million in revenue, down $181 million or 23% compared to the same period in 2019. Sequentially, revenue declined $35 million or 5% with half of the declined attributable to the sale of a business at the end of January. Most of the quarter, revenues were tracking as expected. Market conditions deteriorated in the second half of March and have continued to decline in April, with revenues down in April one-third or 33% versus the first quarter monthly average. U.S. rigs were stable first 11 weeks of the first quarter, averaging 791, but since have dropped by 384 rigs in the last seven weeks. In the U.S. segment, first quarter 2020 revenues were $441 million, down $159 million or 27% from the first quarter of 2019. Excluding the revenue impact from the January divestiture, U.S. revenue changes were equal to rig count changes sequentially and year-over-year. U.S. Energy Centers contributed 50% U.S. Supply Chain Services 28% and U.S. Process Solutions 22% of first quarter 2020 U.S. revenue. In the Canadian segment, first quarter 2020 revenues were $78 million, down $8 million or 9% from a year ago, up $2 million sequentially. In the International segment, first quarter, 2020 revenues were $85 billion, down $14 million or 14% from a year ago, which reflects reduced activity in the U.K. due to location closures in the fourth quarter of 2019, project declines, the sale of a business in January, and then approximately $2 million unfavorable impact due to foreign exchange fluctuations. International revenues were down $10 million…

Thank you, Dave. With regard to our outlook, we're expecting spending to be down significantly on a year-over-year basis. Due to that challenging environment and OPEC visibility, any guidance we provided on previous call is no longer in effect and we're not providing any guidance for the second quarter or for the full year. In this environment, we know what levers to pull to get through these challenging times. Cash preservation is top of mind as is defending a solid balance sheet that provides our stable foundation. I want to emphasize, we will continue to adjust where necessary, especially with regard to our structural transformation plans as the market dictates in order to protect our balance sheet and our company. We remain focused on M&A as a lever for inorganic growth, targeting accretive margin businesses that provide non-commoditized products or technology that fit within our market strategy. We have some deals working and we're still forging for opportunities. But given these unprecedented conditions, it's caused us to take a breath and it's caused sellers to take a breath. We're still looking at valuations within these companies and we're talking, but we're being patient to protect our balance sheet. And while acquisitions are still a core part of our strategy, we're being prudent stewards given uncertainties in the market. We do believe that this is the time for getting good deals at good prices, and we believe there'll be opportunities out there that we don't yet know about, but we're focused on patients and prudence allowing for flexibility and agility in this market. There's no doubt this downturn will reshape our company, our industry, and the competitive landscape. Compared to the 2015/2016 downturn, DNOW is in a better inventory position, not hampered with an SAP implementation and is more scalable and…

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And from Cowen, we have Jon Hunter. Please go ahead.

Hey, good morning everyone.

Morning Jon. How are you?

Good. Thank you. I hope you're all doing well. First question I had is just on the outlook in the second quarter for revenues. I understand you're not giving specific guidance, but we've heard a number of completion levered companies talk about complete shut-ins in the second quarter. And we've heard of activity declines of 75% to 85%. So, I'm wondering how DNOW's revenue, specifically U.S. upstream related may compare to those types of declines. And then on the International side, we've heard down 10% to 15% in the second quarter, so I'm wondering how you view that as well. Thank you.

I'll start with a couple of broad comments and possibly Dave will have some details to add. The second part of your question I think is fairly easy the 10% to 15% decline in International feels right. Again, early days, a lot of unknowns with respect to impact of COVID outside of the U.S. as well as inside. But that feels fairly right. And we too have seen the estimates for second quarter overall activity declines. You can see what's happening in the rig count. And I think likely for drillers and pressure pumpers that sort of forecast makes sense. But I'm glad you asked the question the way you did in terms of how it might rollout for us. Again, we've not given guidance, but let me give you some things to think about. You heard Dave say in his prepared remarks, that phrase, intentionally avoiding low margin businesses and I want to look back first and talk about the revenue in the first quarter. And every time you've heard us talk about market share in our prepared remarks, you heard the word profitable in front of it. We don't think we have to worry or focus on driving any kind of competitive change in the marketplace. This kind of decline in activity is going to do that. There will be competitors who will not make it through this downturn, who will be weaker as they come out of the downturn. So that's not what we're going to focus on. We're going to focus on profitable business that underpins the investment that we have in our company. And I think that you've seen a good sign of that in the first quarter with revenue coming down, 5.5%, you saw that margins improved a little bit net of inventory write…

Thank you. I appreciate that. And then my follow-up question is just on free cash flow and working capital release for the year, if you have any broad expectations. I mean, back in 2015/2016, you released $300 million to $400 million just from working cap. So, wondering if you can help frame how much of a tailwind that might be and what free cash flow could look like for the full year.

Okay. Jon, this is Dave. So, of course, back then I think we entered the 2015/2016 downturn with almost $1 billion in inventory and in a really large number for account receivable. So, we won't see those kinds of free cash flow numbers like we saw back then. So, it's a function of really our starting balance sheet. The opportunities here are too -- and that the cost of the revenue decline has got to be -- we're going to generate cash and receivables, although, we'll see more bankruptcies and then struggling customers, which will make liquidating receivables a little harder in the early parts of this downturn because it's so severe, perhaps worse than 2015/2016. So, we're really focused on granting credit and extending credit and managing credit very tightly, enabling the highest possible revenue we can generate. And then at liquidating inventory, I mean in the positive sense of selling it above costs and limiting replenishment and maximizing margins in the short term to generate cash from that asset as well. But we're modeling a pretty broad range of free cash flow from maybe $75 million to $125 million and that'll vary based on the decline in revenue, which we expect and how liquid our assets proved to be. In the first quarter our inventory turns were the best we've ever had, so that gives me some comfort, but I know we'll have inventory charges just a year unlike we've had to the last couple of years. And I know our bad debt charges will be higher in 2020 as well. So, that's kind of a range of free cash flow and some of the risks we encounter when the knife falls as fast as it is.

Great. Thanks David and Dick, I appreciate the responses.

Thanks, Jon.

From KeyBanc, we have Steve Barger. Please go ahead.

Hey, good morning guys.

Hi, Steve.

It's -- maybe on the innovation side, can you talk more about the DigitalNOW offering, just how differentiated is your competitor, and then separately versus what small competitors have out there? I'm just trying to understand if this is meant to stay relevant or is it a tool that can really drive share?

Look, from a high level it's a -- I look at it and I think our organization looks at it as a split benefit. The easy one and one that we're well down the path on is the internal benefit that drives efficiencies. And really makes it easier for our customer to do business with this sort of once the order is placed, the order management system and all the things that flow from that our to give our customers, feedback and analysis and all those kinds of things that are so important today. We are very well down the road on that. And I would estimate that we probably on a bit of the leading edge as compared to smaller companies, and as you say, others out there in the business. The other side of it -- and it's hard to tell at this point how much benefit will come from each side. But I predict that the bigger benefit will come from the customer facing side eventually. The other side of it is, is just that, that we will have the ability to give our customer a way to do business with us that is crafted around the way people do business today personally and within their businesses, ease-of-use, heavily driven by past practices, so we'll know what customers have done in the past and what they've purchased and why they've selected what if, and we can drive data back to them to help them and to make us a more intimate as a provider. But more importantly to have that platform that, that ability to step into -- to our product offering and seamlessly and easily and quickly buy, manage, pay for and otherwise learn from and analyze and appreciate how the experience went. And so, that's the part that we probably are a little bit behind on. But that's the part where when you hear me say that our Board has unconditionally provided funding and said, make this a priority and go become the disruptor in the business, that's the side that over the next few quarters, you're going to see the most traction from us -- from us in. Dave, might have some more specific comments, but I mean, I just want to give you a sense that it's truly a two component effort at the highest level. And in my opinion, the biggest bang for the buck is yet to come.

Yeah, I agree. I mean, I think, if you look at -- we've talked about location closures and reducing our footprint in the field, that necessitates us becoming much stronger centrally and much more digital in how we engage our customers. So the project this team is working on very -- projects working with customers at creating new revenue channels for the company. So, they're targeted the personal. They're sticky and that customer will buy from us because we're establishing a channel just for them in some cases. So, I'm excited about the revenue opportunities from these initiatives.

Okay. And you talked about how lower drilling and completions could be positive for margin. You've obviously continued to close locations and prune headcounts. For the locations that remain, will you be removing further product lines, because just doing the same things from a product set on a smaller footprint doesn't necessarily lead to higher margins, right?

Well, we've talked for a few years now that we're really focused on high rating -- really all the things we manage in our business, our locations. Each of our locations is a business. So, we grade the location on its operating profit, for example. You look at product lines and over time some product lines become more profitable, because they grow or become less profitable because they become too commoditize. So, we discontinue inventory on those products and we kind of win our position with them. So that remains ongoing. So, it's a matter of high grading. We will benefit from, like Dick alluded to in some of our end markets, because it's higher cost of service and lower margins, we'll see that provide a mixed benefit in terms of gross margin. So, much of this is intentional and we've been talking about it for a few years. Some of it is unintentional, it's vagaries living in this marketplace. But that's the opportunity for us is, is finding our sweet spot locally with certain vendors or certain manufacturers and building on that in this market.

Thanks. I'll ask one more quick one. Do you know what percentage of customers are really stretched from a balance sheet perspective, and are you getting more selective about who you'll transact with based on ability to get paid?

Yeah, I wouldn't be able to get that percentage. I bet it's meaningful, I bet it's 10%. We deal with a lot of customers, a lot of big customers, small customers and we are looking at credit lines with all of our customers, and making sure that we can maximize revenues, which is really challenged number one, and then minimize, the negative exhaust that comes from giving you the wrong on extending credit to some of those customers. But priority number one is growing market share in a shrinking market and then secondarily mitigating bad debt losses, which are inevitable in this environment.

All right. Thanks for the time.

Thanks, Steve.

From JPMorgan, we have Sean Meakim. Please go ahead.

Thanks. Hey, good morning.

Hi, Sean.

So, with the $100 million take out of G&A, year-over-year, the bulk of that will come out for the balance three quarters. Can you talk about the cadence of the reductions and the target exit rate of WS&A as you're heading the next year?

Yeah, we said in the second quarter that we expect WSA would land in the low 110s and then we said that for the full year we see year-over-year savings 2020 versus 2019 of $100 million you lose to that. And then we said our target for that fourth quarter is to exit at a WSA level that if you subtract the 4Q 2019 level, you'll realize effectively $140 million of savings as we move into 2021 versus 2019. So that gives you kind of a feel for what land in the fourth quarter. That's kind of phase one for our efficiencies in the business. We've got those outlined, we're executing on those, but that's where we're targeting to end the year, Sean.

Got it. And so -- yeah, so it'll be -- let's say close to 20% number year-on-year looks better, an extra basis for your top line still falling much faster. So, WS&A, the sales will go up in the near term, that’s typical this point of cycle. But -- so leaving aside any revenue guidance for any given quarter, what's the type of WS&A ratio to revenue that you're targeting on a sustained basis?

Well, we've talked over the years of ultimately, that's going to be -- it's not going to be probable in 2020, but we want to get our WSA level down to 15% or better. That's kind of a long-term goal. That's not going to happen in 2020. We're working on permanent efficiencies kind of rethinking how we deploy cash in terms of expense and where we spend our money. This is not a diet. This is a lifestyle change. So, what's really changed in here, what structural is we're going to be leaner and everything we do going forward. And that's the saleable part. In terms of WSA as percent of revenue, that's -- like I said, that's a long-term goal. That's not going to happen this year, but our mindset has changed and that will enable the kind of ratio our shareholders expect and what we committed in the past.

And so if we just take that one step further, so if your gross margin is say 19% to 20%, you back up the WS&A 15% or better, is the best of business and do you think somewhere in that 4% to 5% EBITDA range or are there other levers to drive that through a cycle basis better than what we've seen in the past.

So, there are other levers. I mean, we're in a deflationary environment we have been probably for five quarters. But our product margins are holding strong. And that -- so that's hard to do it in this market. We talk about -- and still a big part of our strategy is, moving into less commoditized businesses with higher margins, less distribution oriented, more product oriented that'll help bolster margins and evolving -- or really revolutionizing our cost structure to make that net margins better than the 4% to 5% you're talking about.

Got it. Okay. Thanks, Dave.

Thanks Sean.

From Stephens, we have Blake Hirschman. Please go ahead.

Yeah. Good morning, guys.

Morning.

On April trends down 33% or so. Have you seen any stabilization and the rate of change there, or has that kind of continued to decrease at an increasing rate more recently?

It's hard to say. I mean, we gave you the stats on April. We tend to -- because this is how our customers tend to work, we tend to see most of our activity culminate at the end of a period. So, it's hard to read. You really need a few months to get a feel for whether the rate of change is, is changing. I suspect that given that in seven weeks we've lost half the U.S. rigs that rate of change is a snowball that's increased. I mean, so that's my read. Of course, May just began and you don't have read on may yet, but given the precipitous drop in activity, I expect that rate of change to increase.

All right. Got it. And if you look at the balance sheet, you guys still don't have any debt. I mean, is there any reason why you would tack-in on, it sounds like M&A you'd like to do some, but probably not in the ultra short-term, I suppose. So, is there any -- anything else that would talk to you to maybe tack some debt on or you guys plan to keep that debt free?

Sean, it’s Dick. Look, you heard us talk a little bit about our view. M&A still a core piece of our strategy. But I would tell you given what we're going through right now, this is going to cause us to protect our balance sheet even more. It's going to cause -- I would say that one of the outcomes is if we're ever going to consider ever, not just as we come out of this, but if we're ever going to consider debt, the boxes across all of the components of our acquisition template -- we think about acquisitions in the form of it -- we have this template and we think about how well a possible acquisition fits into that in terms of tuck-ins and things. We've got all the components of it. I mean, whereas we -- we might've had a certain threshold in the past -- when you've gone through something like this, I can tell you it ramps up the thresholds. It would have to be an absolute high confidence situation and drive all of our template items. Well, we can't even think about that right now. We understand that one thing the market appreciates about us and one thing that gives us sort of life after this situation is the health of the balance sheet and liquidity that we have. We do think that in a couple of quarters there will be opportunities that we don't even know about today. And maybe some of the -- some ratios would be where we'd like to see for some small tuck-ins. But I think the basic answer to your question is all this -- one thing this will do, is this going to make us even more cautious. This company has done a fantastic job of using its balance sheet and paying it back. And I think what you'll see going forward after coming out of this, it'd be just even more caution and more focus on making sure that selected opportunities kind of hit all the bills.

Got it. Sounds good. I will hop back in queue. Thanks.

Thanks, Blake.

From Evercore ISI, we have Andres Menocal. Please go ahead.

Hey, good morning guys. How are you doing? I'm just stepping in for James who got pulled into another meeting.

Hey, good morning.

So, I've got a few questions. And I think a lot of the good ones are already asked, so my might have more a little bit of qualitative or high level. But the first thing to touch on the technology digitization angle, I think it's good that you can afford to invest there. I don't think many will be able to do so. Again, and credit to your balance sheet. But can you talk through how you're thinking about the payback periods, or the rates return on your technology spending? And just kind of walk me through the framework for how you're evaluating that. Also any color on incremental costs expense saves or productivity gains from percentage base would be helpful. Where internally you plan to apply those benefits throughout the organization, would also be good to learn about.

So just kind of high level on the first part, as we're putting together the plan spending schedule, we got that put together, it's being populated and adjusted every week as we continue to make progress. The paybacks, we're very conservative with what we estimate. But I would say the paybacks are fast -- faster than a typical acquisition, if you will. I'm hesitant to put any ranges out there right now, but particularly when you -- as Dave alluded to, when you fold in the cost savings of our bricks and mortar last mile footprint and all of the costs associated with that, and you then put in some kind of factor for sales upside or revenue upside and then all of the back office savings that go along with some of these steps. I mean, the one thing I would tell you is that payback's going to be faster than what we've seen in our typical business acquisitions. So, that would be the story point. Dave, you got any -- more analysis.

Well, I think, some of the work that team's doing that's kind of rolling off is internal efficiencies that enable us. So, we talked about this morning, we have 1,250 fewer employees in the business, that's very hard to do. But it's in part enabled by the investments we've made so far in streamline how we do business internally. So, that's one of the big benefits to me. And then it's the customer intimacy, where the focus will come from the initiatives the teams can be working on in the future.

Okay. Great. Thanks, guys. And then lastly if I could sneak one in. On the acquisition M&A primary, it's definitely obvious to me that you guys have gotten more constructive on that front or I would say more aggressive how you're thinking about it. But can you kind of walk us through how you see the timeframe for any kind of M&A cycle to play out? I know there's both pros and cons to doing something right now, while your competitors are in clear financial distress versus waiting it out a little bit. So, just trying to get your philosophy on when's the right time to strike?

So, let me start here. I think, I'd be careful in characterizing our -- situation is getting more aggressive. We're getting more intense with regard to forging and watching. But we're getting more conservative with respect, as I said earlier to what we would be willing to move on, number one. And then secondly, we know there's some things out there that are coming to the table that we don't know about. And so, I think, it's -- it would be better to characterize our view as patient. And therefore, that would lead me to say it's going to be a couple of quarters, I believe, minimum before we're ready to get serious. And we make sure that we've seen and be -- and are able to analyze the impact of this very, very quickly falling knife on potential businesses that we feel strategically would fit in. But we know that we have to be able to value them correctly, and we've got to see where this falling knife finally lands before, I think, we can fully do that. So, I would push the message a little bit to the more conservative side. I'd say it's at least a couple of quarters and I'd say that it's going to be a -- it will be harder for us to qualify an acquisition opportunity, because we feel like we just got to be that much more protective of our balance sheet. No one saw this coming. Who knows what the next one will be and when, so we just going to make sure that the targets that we get seriously interested in, they're going to be very fulsomely lined up with strategy and at the right price, and they look like businesses that we can integrate very, very effectively.

Thank you. Ladies and gentlemen, we've reached the end of our time for the question-and-answer session. I will now turn the call back over to Dave Cherechinsky for our closing statements.

Okay. Well, thank you for joining us today and for your interest in NOW Inc. We look forward to you joining us in our second quarter conference call in August. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.