Good morning, and welcome to the Second Quarter 2020 Earnings Conference Call. My name is Brandon, and I’ll be your operator for today. [Operator Instructions] Please note, this conference is being recorded. And I will now turn it over to Vice President, Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Good morning, and welcome to DistributionNOW’s Second Quarter 2020 Earnings Conference Call. We appreciate you joining us, and thank you for your interest in NOW Inc. With me today is Dave Cherechinsky, President and Chief Executive Officer and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the DistributionNOW and DNOW brands and you will hear us refer to DistributionNOW and DNOW as our New York Stock exchange ticker symbol during our conversations this morning. 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 the outlook of the company’s business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on 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’ll 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 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 earnings per share, excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. A reconciliation on each of these non-GAAP measures 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 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 second quarter 2020 Form 10-Q today, and it will be also available on the website. For now, let me turn the call over to Dave.

Thanks Brad. Good morning, everyone and welcome. While this is my 32nd year with the company and 25th earnings call, it’s my first as CEO. I’m grateful and humbled by the Board of Directors’ confidence in me to be the DNOW CEO. This is a considerable responsibility in an extraordinarily challenging environment, but I’m comforted to know that we have the outstanding women and men needed to collectively overcome the adversity our industry faces. I would like to thank Dick Alario, Executive Vice Chairman, for his leadership and for his significant personal investment in my development as a leader. I would also like to congratulate Mark Johnson in his new role. I hired Mark 12 years ago and know he will be an excellent CFO, focused on compliance and protecting our shareholders, preserving a strong balance sheet and selectively seeking differentiating inorganic opportunities. He has a big four audit firm pedigree, is a proud Tulane University graduate and is highly respected as an established finance business leader. Now we will get into the business. In this great shutdown, a period where for the first time in history, oil prices turned negative, drilling rigs and work-over rigs laid down to the lowest levels, capital and maintenance spending were slashed, projects were canceled or delayed, producing wells were shut in and contractors were sent home, making for an unparalleled moment in history and one where DNOW stands strong and is positioned to weather the storm. We continue to execute on our COVID-19 response plan to keep our employees, customers and suppliers safe. We have remained open, operating under the World Health Organization and CDC guidelines by providing essential COVID-19-related products to our employees and customers. I want to thank our frontline employees for taking care of our customers, communities and each other…

Thank you, Dave. For the second quarter of 2020, we generated $370 million in revenue, down $406 million or 52% compared to the same period in 2019. Sequentially, revenue declined $234 million or 39%, in line with the global rig count change. In the U.S. segment, second quarter 2020 revenue was $260 million, down $181 million or 41% from the first quarter of 2020, outperforming a rig count decline of 50%. Excluding the revenue impact from our January 2020 divestiture, second quarter revenues were down 55% from last year compared to rig count declines of 60%. Our U.S. energy center revenue was down 40% sequentially as many of our customers reduced spending by laying down rigs, suspending drilling and completion programs and deferring projects and nonessential maintenance during the quarter. In the U.S. upstream space, we had several project wellhead hookups and tank battery wins, contract renewals with drilling contractors and E&P companies that will secure future revenue. In the U.S. midstream space, our ability to provide a customizable solution unique to that customer resulted in winning business at six operating locations by bundling our materials and warehouse management services with our DigitalNOW platform. For our U.S. supply chain services channel, revenue declined 52% sequentially, resulting from reduced drilling and completion expenditures from our top SCS energy E&P customers, one of our top revenue customers reduced spend nearly 80% sequentially and a sprint to conserve cash. Infrastructure midstream projects for our SCS customers were minimal or postponed, as plant turnaround projects that were scheduled for 2Q 2020 pushed out to 2021. Our U.S. Process Solutions business revenue was down 30% sequentially on lower upstream completions and project activity due to the impacts of COVID-19 and demand loss for oil and gas. Customers suspended all nonessential activities, worked through existing funded…

Thanks Mark. Now with regards to M&A, the role of acquisitions and our long-term growth strategy remains intact. The global pandemic impacted the dynamics evaluating inorganic opportunities but our pipeline is active. We are in discussions with targets and see 2Q and 3Q as critical periods for financial performance in terms of earnings durability, how targets manage their business in this period, provides a critical stress test in determining the value of their company. While being cautious with the valuable currency of the balance sheet, we seek targets that fit well with DNOW’s know-how, generate higher returns and are instantly accretive. Looking toward the third quarter, the summer months in the U.S. and Canada, emerging from breakup, usually set up the third quarter to be our most active quarter of the year. This year will be different because the July levels of rigs and completions are dramatically lower. For example, July U.S. rigs are 36% lower than the 2Q average, and June U.S. completions were 41% lower than the 2Q average. Our view is that revenue in the third quarter will decline in the low to mid-teen percentages. Regarding warehousing selling and administrative expenses, while WSA was $130 million in the first quarter, and we guided the second quarter to be in the low $110 million with actuals being $97 million, we expect the third quarter WSA to be in the high 80s to low $90 million range. We are executing on the new DNOW strategy: our structural changes, our cost transformation initiatives and our end-market diversification. Cash preservation is paramount as we continue to defend our balance sheet to provide a stable foundation. We continue to invest, develop and deploy digital technology solutions that fortify our position in the market, increase customer value intimacy and mark a key part of our strategy. Our sites are set on being the digital disruptor in our space in terms of technology, product application knowledge, access to world-class products and a growing aftermarket business. In closing, we improved an already stellar balance sheet by expanding our cash position to $269 million, and we remain debt-free. We are taking decisive measures to achieve structural efficiencies by combining businesses, centralizing support functions, delayering management, consolidating distribution centers and evolving the branch model while also making significant cost reductions. We are deploying technology to eliminate repetitive tasks and condense the order to cash process as well as investing in digital tools to enrich the customer experience. I am confident in our talented people, the continued streamlining of our business and the technological advancements we are making through our digital tools platform, DigitalNOW. And we are building a resilient model to drive long-term growth, fortify our upstream position while diversifying and investing in the midstream, downstream and industrial end markets. Now let me hand the call back to Brandon, and we will start taking your questions.

Thank you [Operator Instructions] And from Scotiabank, we have Vaibhav Vaishnav. Please go ahead.

Hey, good morning, guys and thank you for taking my questions.

Good morning, Matt.

First of all, kudos to you in the WSA reduction that you guys have done and what you are targeting, so pretty good. You mentioned low longer forever. Can you talk about like what do you think is the right WSA amount for that kind of scenario as we think about next year and next couple of years?

Well, I don’t think we are ready to talk about where we will be next year. There’s just too many unknowns in the market. But what I want to say about WSA is we are gone through more than just a transformation we are resizing this business on a permanent basis to be able to grow without adding a lot of cost and once the next downturn comes to not have to be in a position like we are in today, to have to pull out a lot of cost and miss out on some opportunities. So we said on the last call, our WSA would be in the low 110s. Our management team has been working very hard to find where we can get leaner and where we could while we do everything we can to retain revenues in the process. And we got to $97 million in the quarter. And that includes a lot of severance in that number as well. So we have made a lot of strides. We know we have more to go, but we are being circumspect about what we are doing. What the commercial implications are, how it impacts our customers, and we are kind of proceeding on a rapid but thoughtful basis. So we talked in the third quarter of the WSA being in the high 80s, low 90s, and that’s where we are at right now, Vebs, acknowledging that the gross margin dollars in the second quarter were lower than WSA. And that’s probably going to be the case in the third quarter as well. We need to get to breakeven. We want to point out, and Mark said it and I may have said it too, that if you take out inventory charges, which is simply the result of going from a strong market, relatively to the worst market in my 32 years, we had a big drop in revenues and consequentially in gross margin dollars. So but we almost narrowed that difference except for the inventory charges. So that is a major achievement. So I think we acknowledge we have more cuts to make. And we had a first phase and a second phase, and we will do more, but we are going to be a lot more plotting about the next steps. And we gave guidance to the third quarter, and that’s as far as I think we will go right now.

Okay. That’s helpful. You talked about DigitalNOW, can you talk about like maybe quantifying it, like how much revenues do you earn from DigitalNOW today? And over the next few years, how do you think about what that business can bring in?

Well, we have said on recent calls that about one-third of our revenues go through some version of electronic interface with the customer. Now that’s evolving as we are introducing new technology. But today, it’s about one-third. And I elaborated on some of the things we will be implementing. But in the future, part of our long-term strategy in terms of pulling out cost is going to be enabled by how we connect with our customers. The easier it is for them to buy from us, the more they will buy from us. So the more we invest in the technology that simplifies that process, the more cost we can take out of a transaction. But today, it’s one-third, and we think there’s plenty of upside. But a lot of this is happening with existing customers, so we are simply transitioning from a more traditional model, phone calls, walk in orders, etcetera., to newer models that don’t change the revenues that much but enable us to pull out cost.

Okay. And maybe last one, if I may. You talked about how you are trying to expand into alternatives midstream, downstream. How you are changing your or how you are changing your sales force? Can you talk about like can it be done organically or can it be a big you also talked about M&A. So maybe like how you think about M&A and then moving into alternatives or other segments?

Yes. I think in the U.S. anyway, most of that, the great preponderance of that will be organic, especially in the midstream space. However, if you look at the last few years, I think the last four acquisitions we made were in Process Solutions, and a lot of that business is midstream focused. So I think the opportunity is, we are an established distributor in the midstream space. And like we said on the call, we have been primarily upstream focused, but we have a big push in midstream. I think most of it will be derived organically. But the acquisitions on the table right now, really, all of them are in the Process solutions space, and we think we will pick up some midstream there. But downstream might be more likely to be a target for acquisitions, and we have made some attention there and haven’t been able to conclude the deals. But in North America, I see most of that organic, to answer your question, Vebs.

That’s very helpful. Thanks, sir.

Thank you.

From Stifel, we have Nathan Jones. Please go ahead.

Good morning, everyone.

Good morning.

Good morning, Nathan.

Well, I really want to add congratulations to everybody on the new roles.

Thank you.

I guess I will start with a follow-up question on the WSA structure. If we get to kind of this 90 run rate that you are talking about here, if we go back a couple of years in the last recovery, you added a significant amount of revenue without adding a significant amount back to WSA without really adding any back really. Does this leaner cost structure suggest that you would need to add more costs back in the recovery this time than you did in the previous time? Or do you think that you could add a significant amount of revenue back into the business without needing to increase that WSA structure along with it?

Well, that’s a great question because in the last downturn, we didn’t make the kind of cuts in 2016, which I call kind of the double the second year of a downturn and double downturn that like we are made today. So we are starting at a real low-cost base at this. If we are troughing here, Nate our cost base is real low. When we when revenue comes back, we will absolutely add people. The challenges and the way we are structuring the company is, we want to we still want an established distributed model. We want to be in 150, 200 locations around the world. We want to be close to our customer. But the design of the branch will evolve. So today, we might have 10 people and 6 trucks and $0.5 million in inventory in a town. Tomorrow, that will change. But when an area grows, when you have when you are really getting to a kind of a much more efficient model, we will add back, but we should have our traditional flow-throughs have been in the 10% to 15%. And to your point, in those recovery years, 2017, 2018, 2019, we didn’t add any cost as we grew the business. Here, it will be a little different. We will be adding cost. But hopefully, the incrementals as revenues would climb would be north of 10% to 15% and maybe in that 15% to 20% range.

Okay, thanks for that. With oil prices getting back here into the low 40s and pushing up toward the mid-40s here, if I look back at the oil price recovery in the last cycle in 2015, 2016, it’s about the same price now as it was getting back to in 2016 and then 2017 was a growth year. If oil prices stayed in this low to mid-40s range, would you expect investment from your customers to increase next year?

If oil got into one range?

Where it is now, low to mid-40s.

Well, I would expect things to be if it’s in low to mid-40s, yes, there will be some upside, but not much. I mean one of the big things I look at is oil storage. If that begins to deplete, then you would see a period of low to mid-40s oil, but then I think you would see it grow, and you would see more completions done, etcetera. So I don’t know how long that window of that low oil price range would last. But if oil stays in the low to mid-40s, I don’t see a lot of growth opportunities, except taking market share through acquisitions.

Okay, fair enough. I will pass it on. Thank you.

Thank you.

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

Hey, good morning, Dave and congratulations on the new role. Good to hear your comments on bridge to higher margins. You reiterated the message around exiting high burden, high cost product lines, but can you talk about how you educate customers that they will have to change where they will procure some of those products? And how do you mitigate moves from competitors who may be willing to sell those loss leaders to take share?

Well, so that the answer to that question kind of changes depending on where you are in the cycle. So I’ve talked for a few years about how we have been intentionally walking away from business to improve our gross margins. And we had a lot of success in that regard. In a market like this, we and our competitors are actively trying to liquidate inventory. So everything is a little messier in that regard. So we are trying to burn off inventory and then position ourselves for a recovery by buying new, hopefully, lower cost inventory. But I see that the margins on that being a matter of Mark, what would you add? Mark wanted to say something.

No, I think it’s really what you saw in this period, it’s mix. And so I think some of that uplift that we have seen here kind of mask some of those challenges there where people are trying to find the bottom on price to really make, in some cases, the next payroll cycle. So I think we are being very intentional in what we stock and having the right the mix if that’s import or domestic. And so I think that’s how we work to educate our customers moving forward, including substitution opportunities in that space.

Yes, I agree.

That’s helpful. So in the next up-cycle, you will be able to maintain this better mix of margins and stay away from the things that you have sold in the past that may have been dilutive to gross margin?

Yes. I mean I think, Nate, we should be able to bolster gross margins as we win all the less profitable lines. And part of what we want to do is we move forward is be a lot more selective about the suppliers we support. As a distributor, as a large distributor. The more you have more power with your manufacturers to the extent you could standardize. And part of a big part of our push as the recovery comes, is to help us have our customers help us standardize and get the best deals from and better margins as we narrow our supply base.

Okay. And on your comments on being able to diversify revenue streams organically, given you’re already in some of those mid and downstream markets, does this come down to increasing marketing efforts to let customers know you’re more focused there now? And realistically, when do you think you can start to see some share wins?

Well, I think we are making a lot of gains in midstream, and I talked pretty exhaustively about it in my opening comments. But yes, it does require more marketing, more salespeople on the ground, there are parts of the country. So let me elaborate it in this way, Steve. Traditionally, our branches were largely geared toward an end market. So we would have branches that were purely drilling contractor focused, purely downstream focused. And that made sense, usually because there is enough revenue to support that. Today, we are taking what used to be single-purpose branches, making them multi-purpose and doing fulfillment locally by putting a lot more focus on our sales efforts. So there are parts of the country where perhaps we have underserved the downstream end market. So we are adding salespeople, and I won’t get into which parts, but we’re adding salespeople there to kind of fill those holes. And midstream, it’s a very big focus for us. We meet weekly on our midterm midstream strategy, our targets, who’s accountable, what does it take to build those relationships and take share in that arena.

Yes. And for the DigitalNOW customers that have been signed up for more than a year, what kind of year-over-year volume growth are you seeing? And I’m just trying to gauge how productive older customers are becoming versus newer conversions, because that seems like a really important part of your go-forward strategy?

Yes. That’s a great question and one which I asked routinely. And what we do is so I look at the stats, I look at the list of customers, and I look at the quarterly trends of revenues and you try to find inflections. Well, in a market like this, it’s hard to see that. What I do look for is what was the method of transactions in the past and in what way have we converted those customers. So right now, you really don’t see much revenue build. You do want some discrete customers. And I mentioned one on the call, where we are now getting the lion’s share of their business because of how we are integrating with them. But because of kind of the carnage in the marketplace, it’s not visible at a customer level, but it will be when the market begins to build.

But you could definitely see the progress in terms of engagement?

Yes, absolutely.

And then last one for me, with the revenue looking down mid-teens sequentially, are you seeing signs that some of the smaller private guys are folding or are they hanging in there and trying to cut price and just maybe differentiate by service level or something regardless of efficiency?

We are seeing both. We are seeing competitors close locations, lay off people like we are and going out of business. But in these in the throes of the trough, you are seeing really heavy bidding right now where people are doing all they can to liquidate inventory. So we are absolutely seeing that. And it’s becoming most intense right now. So that could put some pressure on product margins. I mean Mark talked about stability in our product margins, but that could provide some headwind as we in these last throes for some of our competitors.

Got it. Thanks. Appreciate the time. Thank you, Steve.

Thank you, Steve.

Thanks, Steve.

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

Thanks. Hey, good morning.

Hi, Sean.

So Dave, you noted the inventory impairment was tied to exiting certain product lines are no longer accretive. I’m just thinking back historically, your lowest margin business was a lot of, in effect, pass-through, one-off bespoke items through the Wilson export business. I am just curious if it’s those types of sales that you are eliminating? And if not, what areas are you exiting? And should we expect more inventory impairments going forward or has the review been comprehensive already?

Well, a portion of the inventory charges, which I believe were $12 million in the quarter was due to location closures, the fact that we had a much more vibrant stream of revenues in the fourth and first quarters. And now things have really slowed to a trickle. Some of that is just obsolescence non-usage. A portion of it is, we are making low margins on product lines, the infrastructure to support those product lines exceed the expected gross margin. So we simply make personnel reductions, close facilities and discontinue stocking those items. To answer your question more broadly, we spoke last quarter about elevated inventory charges. We think that will persist for a few more quarters. The third quarter, hopefully, is the bottom. July was worse in almost all regards than the second quarter. So the second quarter was not the bottom, and the third quarter, hopefully is. Once that stabilizes, once we see the demand pattern for products, once we see profitability on a customer basis, location basis, product basis, then we assess, are we going to keep in that strand of electrical products or not, that kind of thing. That’s kind of the decision points. But inventory charges for the next few quarters will remain elevated.

Okay, got it. That’s really helpful. And then I was hoping to maybe just dig into some of the other nuances within the segments. Energy branches were relatively more resilient to maybe what we would have thought supply chain hit a bit harder. Within supply chain, would you characterize as some of your larger customers have been some of the most aggressive in reducing their capital budgets and perhaps that explains the delta there. And then midstream and downstream getting more attention from your perspective, is that what’s helping sustain energy branches to a degree? I’m just curious where if you’re taking market share in those mid and downstream areas that are also seeing some significant reductions in spending, where whose share are you taking? What do you think?

Well, to your last point, I really don’t want to say from whose ox is getting gored. But in terms of supply chain, it’s a matter of one big customer who is really, like Mark said, is sprinting to generate cash. That alone brought down the supply chain revenue significantly. That was a big drop in purchases. We think that they bottom for that particular customer, and we will think they will start to spend a little bit more, but not a lot more. So that’s what’s driving that bigger fall in revenues in supply chain services versus energy. And part of it is just a matter of time, and we have talked about this before, Sean. Normally, rig count declines, we will see a lesser revenue decline. Now I expect to see a closer link given the pandemic that we’d see a closer link to in revenues to rigs, if that’s not happening. But I think when we’re picking it up is in midstream. We are very focused on the midstream. We have got strengths there. But our focus has generally been there has been a gravity about the upstream business, which by necessity is changing given the lack of activity there. So we have a keen sales focus. We are making pick up a lot of ground in South Texas. And we have seen some of our competitors exit South Texas, and we’re taking advantage of that.

Got it. That’s very helpful. Thanks Dave.

Thank you, Sean.

From Northland Capital, we have Doug Becker. Please go ahead.

Thanks. Dave, congratulations on the new role, well deserved.

Thank you. Welcome, Doug.

I appreciate it. Just given all the structural improvements you’re making, and we’re seeing clear evidence of it, do you think you will be able to remain free cash flow positive if we are going through a gradual recovery? I can see it would be difficult in a sharp recovery, but at a gradual recovery, maintaining free cash flow positive given some of these changes?

Yes I think that’s – I can answer that one. So in a recovery, as we grow, we tend to consume cash. Now this were 2017 and the market was strengthening like it was in 2018, we didn’t we were pretty good in terms of we consume a lot less cash because we had high DSOs and low inventory term rates. Today, things are very different. Except for the second quarter, we had been in the first quarter we turned our working capital better than ever. So we went into the second quarter with relatively low accounts receivable, relatively low inventory. And so we are kind of in a liquidating mode, not in the pejorative sense, but just managing the assets. So in a recovery, if it were slight in inventory, we probably improve our inventory turns, and we would be probably be able to just slow the purchase replenishment of inventory. But I think even in a slight recovery, we would see some consumption of cash given how lean our balance sheet is right now.

Makes sense. Any target in terms of that non-cash working capital obviously spiked in the second quarter, but a function of the revenue there. But just going forward, is maybe first quarter a reasonable target as we think structurally going forward?

Mark, do you want to take that?

Yes, the conversation around working capital as a percent of revenue? Is that yes. Sure. Yes, I think Dave had a target of, at least for the rest of this year, for 2020, to be $75and $125 million free cash flow. I think the guidance we are giving for 3Q we are comfortable holding to that right now. I think really, its inventory is going to be one of the main drivers, as Dave has already touched on, is that’s a main source of liquidity for us and seeing our customers really pull back spending as drastically create a little bit of inefficiency off of that 1Q peak. So I think you are going to find us not in the highs that we came off of during the last downturn, but probably in the midpoints of where we are now and where we have executed on historically.

Yes. I think we’ve said for many years, we said we wanted to turn our working capital four times a year. But for most of the last year, we were under we were better than 5. We got to 18% working capital as a percent of revenue. So 20% is our target. We don’t want to get our assets that liquid even especially in the best of time. So like you say, as a function of a decrease in sales, you will see our turns slow. You’ll see our customers trying to pay us more slowly like they have been that’s kind of a palpable reality in our business. But we will get the working capital offers back up, especially when we start to see some more revenue traction.

Great, thank you very much.

Thank you. Doug.

And from Cowen, we have Jon Hunter. Please go ahead.

Hey, good morning and thanks for taking my questions.

Welcome. John. Thank you

Thank you. So I had a question on just your revenue expectations for the third quarter to be down low to mid-teens curious how the second quarter progressed from a revenue progression and how that flows into your expectation for third quarter revenues. Kind of a second part and related part to that question is, is your outlook based on customer-specific spending plans? Or is it more related to kind of what you are seeing in overall completion activity?

Well, I think it’s completions primarily. And so July rig count and completions are really low. So comparing that to the 2Q average, and then you asked about kind of revenues through the quarter, July or June was a better month than May. We kind of expected that because in terms of business days, it was 10% longer and but June has shaped up relatively strong compared to relatively weak June. July was we lost ground in July, primarily due to the drop in completions. We are in terms of specific customers, some of our bigger ones, we see stabilizing. But our kind of our Power Service business, a big fabrication part of our company. They are seeing orders diminish as completions have dried up. So that’s going to slow things down. So that’s a known area of decline we’re seeing. But on a specific customer basis, we think we are gaining market share. We’re seeing zero-sum transitions of winning new business we steal from our competitors, and we’re very excited about that. But the leading indicators of rig activity and completions just start so low in the quarter. That’s the main thing driving our guide in the third quarter.

Thank you. And then kind of following on to that, I know it’s early, but what kind of visibility do you have into the fourth quarter, typically things in terms of revenue falloff a little bit sequentially. So curious how you are seeing the sequential move from 3Q to 4Q today?

Yes. I mean here’s the best I could do. I mean 4Q is usually a slower quarter given the many factors we talk about, budget exhaustion, just the seasonality alone, 4Q could be different if things were to percolate. We don’t see anything that’s going to say activity is going to pick up in the fourth quarter. So I expect the fourth quarter to be a little skinnier than the third quarter, we just don’t have a good view yet.

Got it. And then just the last one for me is in terms of gross margins, I mean, your margin performance was particularly strong, excluding the inventory charges. So curious how you think of the sustainability of that margin level as we head into the third quarter?

Yes. I think we guided to revenues dropping a bit. I talked a little bit about the aggressiveness of our competitors, particularly in the Permian, interestingly. But to me, it’s always been the most competitive arena even in the best of times. But there’s a lot of real aggressive pricing happen there. So that will affect our product margins, which could have some downward pull on our gross margins as well. So we’ve been real happy. We’re in a deflationary environment. We’re seeing pipe prices going down month after month after month or steel prices more broadly, which affects almost everything we sell. So I think we’ll see some gross margin pressure again, we’ve been able to buttress that somewhat by the focus of which products we’re going to buy, stock and sell. But it’s hard to do that in an environment like this.

Great. Thanks, Dave. I appreciate the responses.

Okay thank you.

Ladies and gentlemen, we have reached the end of our time for the question-and-answer session. I will now turn the call over to David Cherechinsky, CEO and President, for closing statements.

I would like to thank everyone for calling in today, and we’ll catch up with you next quarter.

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for joining. You may now disconnect.