Welcome to NOW Inc. Fourth Quarter 2022 Earnings Conference Call. My name is Adam, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Vice President of Digital Strategy and Investor Relations, Brad Wise. Mr. Wise, you may begin.

Well, thank you, Adam. And good morning and welcome to NOW Inc's fourth quarter and full year 2022 earnings conference call. We appreciate you joining us, and thank you for your interest in NOW Inc. With me today is David 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'll hear us refer to DistributionNOW and DNOW which is our New York Stock Exchange, ticker symbol during our conversation, this morning. Please note that some of the statements we make during this call, including the responses 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 February 16, 2023, 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 our 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.dnow.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 attributable to NOW Inc., excluding other costs, and diluted earnings per share, attributable to NOW Inc., excluding other costs. Each excludes the impact of certain other costs, and therefore have not been calculated in accordance with GAAP, please refer to a reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of 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 fourth quarter and full year 2022. A replay of today's call will be available on our site for the next 30 days. We plan to file our 2022 Form 10-K today and it will also be available on our website. Now let me turn the call over to Dave.

Thanks, Brad and good morning everyone. Two years ago, this week, Mark. Brad and I were shivering in this office on our earnings call running unlimited backup power during the great Texas freeze winter storm, Uri. That storm brought the coldest temperatures in over seven decades to Texas in a cold snap that impacted millions of people from Texas to the Canadian border. We had no power and more chilling had no earnings in the year just ended 2020. The roads were impassable the path to the future uncertain, misery pervaded the whole economy, but there were some things at that time I was certain about, about how a new DNOW could transform itself and thrive. One, we knew that the single most important factor and successfully implemented a strategy path, be fully committed be disciplined and purposefully reject to the temptation by those marginal distractions which would dilute our strengths. Simply put, build on and get better at what we're good at equip our people allocate talent and time where our customers see value and let the other guys deal and distractions. Two, we messaged exhaustively about deliberately high grading our business by that we mean focusing on higher margin manufacturers, businesses, product lines, locations and activities to deliver strong gross margins irrespective of inevitable commodity price gravity. Be selective manage mix and maximize margins. We picked Partners as suppliers expect partnership reciprocity commit - purchase volumes to them honor our commitments promote their brands and deliberately promote value. Three, our primary operational objective was to increase customer intimacy, improved product availability, manage projects and deploy ample inventory stocks regionally ultimately redesigning our PBF distribution business by deploying a more efficient fulfillment model moving from a highly autonomous branch model to a more cohesive regional supercenter posture. This transformation…

Thank you, Dave, and good morning everyone. Total fourth quarter 2022 revenue was $547 million, down 5% or $30 million from the third quarter. On a year-over-year basis, the 2022 fourth quarter revenue was up $115 million or 27%. On a full year basis totaled 2022 revenue was $2.1 billion up more than $500 million from 2021 or an increase of 31%. EBITDA excluding other costs or EBITDA for the fourth quarter was $47 million or 8.6% of revenue. Nearly tripling the EBITDA dollars delivered one year ago. On a full year basis totaled 2022, EBITDA reached 8.2% of revenue or $175 million nearly four times the EBITDA dollars delivered in 2021. This marks the third quarter in a row that our quarterly EBITDA dollars surpassed the EBITDA produced for the full year of 2021. EBITDA to revenue flow throughs were 20% sequentially and 26% year-over-year as a result of our team's execution and strategic focus. The U.S. revenue for the fourth quarter was $414 million down $21 million or 5% sequentially driven by seasonal impacts of the holidays and fewer working days. 2022 U.S. revenue totaled $1.591 billion for the full year, up 37% or $428 million from 2021. Our U.S. energy centers contributed approximately 76% of total U.S. revenues for the fourth quarter with our U.S. Process Solutions Group contributing the other 24%. On a full year basis, U.S. energy centers contributed approximately 78% of total U.S. revenues in 2022 with U.S. process solutions contributing 22%. Turning to Canada for the fourth quarter revenue was $75 million, down $11 million or 13% from the third quarter of 2022 on fewer rigs and the primary result of customer projects, delivered in the third quarter. As we discussed on our last call and a 4% negative impact of foreign currency,…

Thank you, Mark. It's our intention to play a bigger, more active role in the energy evolution. We see a growing number of opportunities where DNOW can collaborate with our customers to reduce our Scope 1, 2 and 3 emissions with the products we provide combined with our supply chain services and digital offerings. We are helping our customers work towards meeting their greenhouse gas emission reduction goals working closely with our corporate focus ESG teams to identify and eliminate greenhouse gas emissions by upgrading their aging oil and gas PBF infrastructure, replacing gas pneumatic systems with compressed air systems and partnering with our supply chain management teams in areas that lead to emission reductions tied to improve supply chain efficiencies related to materials managements and logistics to support their production. I'm proud of the positive impact our DNOW employees are having on our industry, not only reflecting on our own ESG journey, but positioning DNOW is a more important contributor to our customers. In fact, we have seen many of our customer set goals to reduce or eliminate flaring in one example I point out ExxonMobil's recent announcement to end flaring in the Permian and earmarking some $17 billion on reducing its emissions by 2027, according to a January Reuters report. In an effort to tap into this demand and expand on the contribution, we are making in lowering our customers emissions. I'm happy to announce that in December 2022 DNOW further expanded our set of energy evolution and ESG solutions by completing the acquisition of EcoVapor Recovery Systems. EcoVapor has a unique position in the oil and gas sector. Its patented process technology addresses the venting and flaring of gas from oil and water tank batteries allowing operators to reduce emissions while generating revenue from the sale of…

Thank you. [Operator Instructions] And our first question today comes from Cole Couzens from Stephens. Cole, please go ahead. Your line is open.

Hi guys, thanks for taking my questions.

Good morning, Cole. How are you?

Doing well 2023 looks like it's going to be a strong year for cash generation with $100 million of expected operating cash flow, can you guys talk a little bit more about how you plan to allocate that between M&A and repurchase?

Well, I think we would continue along the same path. So we said when we launched the share repurchase program that our priorities were fund organic growth and we've done that and we're focused on that. In 2022, the market expanded our revenues grew 31%. We think that rate of growth will decline, but the strong in 2023, thus allowing for more cash thrown off from the business. So that allows the opportunity for more M&A we closed two deals in December 3 and the full year 2022 and that's a priority for us as the rate of growth in the organic space is a little lower. We're going to focus even more on M&A, and of course the third alternative is to bolster our participation in our share repurchase program, which began in earnest in the second half of last year.

That's helpful. And on WSA you guys saw pretty significant improvement in 2023. Can you talk through any additional levers you have to continue to drive improvement in productivity there?

Sure, this is, this is Mark. I agree, I think us transforming the business over the last several years has really generated record flow throughs on this revenue growth. So, I think our focus for 2023 is a lot of intent on gross margins. Looking at the levers there as we all recognize steel pipe or steel prices in line pipe prices have stabilized, some in and are starting to come down a bit. So that's a focus of ours, finding ways to maximize margin mix as well as operational efficiencies. We're still marching through our supercenter model and finding ways to enhance that closeness to customers and solutions there. So in 2023, it was an incredible year for us in that productivity our guidance in next year would have lighter flow throughs on a year-over-year basis, because we will have some gross margin compression slightly forecast and then WSA. We're going to continue to invest in the business.

Great. And if I could squeeze one last question and talked about gross margin kind of being down in '23. How are you guys thinking about gross margin seasonality throughout 2023?

Well, I'll take that, Mark. I think we're going to start off the year 1Q tends to be our lowest gross margin period that's just how it tends to be. So I think we'll see a little bit of a dip there for the seasonal impacts. And in 2022 like 2021 our purchase volumes especially towards the end of the year ramped up enough where our vendor consideration, we kind of topped it off in the fourth quarter and it favorably impacted gross margins. So, I think we'll see first quarter contraction. But I think the first half gross margins will be stronger, perhaps in the second half. We haven't talked about overall gross margin changes going into the new year, but it could be a 30 basis points decline, but still well above our 2021, 2022 average. If you recall, we had pipe prices mid '22 at very high levels. We enjoyed the benefit our competitors enjoyed the benefit of that kind of hyperinflation in pipe. Like Mark mentioned earlier that's diminish. So, we still expect really strong gross margins, but a little bit of an easing going into the New Year.

Perfect. Thanks guys. I'll turn it back.

The next question is from Nathan Jones from Stifel. Nathan, please go ahead. Your line is open.

Good morning, everyone.

Good morning, Nathan.

Good morning.

Dave, I'm going to pick up a comment you made in your opening remarks that said build on and get better at what you're good at and avoid distractions. Can you maybe talk about where you think you are in that process? What are the primary things you need to build on and get better at? And you don't have still thinking there within the business that you need to maybe get out of the business to avoid some of those restrictions?

Yes, I think we're, really I was referencing the sentiment and the main thing I wanted to focus on two years ago. We've done a lot along those lines. We're a much more efficient, organization. We've changed our fulfillment model, where historically most projects were managed from all of our locations. It was inefficient, it left excess inventory across the whole network. We've tried to regionalize that where we can manage projects regionally with a lot better flow through more efficiency and I think we're very well down that path. And we're going to, we have - we talked about a supercenter that we're going to expand in Canada in the first half of this year. We'll probably do another one, which we haven't named the location yet publicly, but we'll probably do another one, the first half of the year as well. With that standing up a bit that newer supercenter will be well down that kind of journey towards optimizing the network. Now it's a matter of seizing growth organically and inorganically.

Okay, thanks for that. I guess second question I wanted to ask on this EcoVapor business is this I was just thinking about it as it relates to power service and 10K tank battery solutions that you're doing is this basically just a piece of equipment. You can bolt on to the 10K tank battery that will capture some of the emissions that come out of that, I would think that's a pretty easy way for you to kind of expand their sales. And just what you believe the main opportunities for you to grow their sales?

Hey Nathan this Brad, I'll start and maybe Dave or Mark will have additional comments. But, yes, you're right, I mean this is - we highlighted two applications. First of all in the prepared remarks, the first one being oil and gas tank batteries the other opportunity to be in the RNG market which is positioned to grow greatly. In the oil and gas market, the opportunities in existing tank batteries, what we call it brownfield applications are attractive. They tend to be lower flow rates where new greenfield opportunities are larger tank batteries that have higher production. So we have a scalability of our product based on the flow of gas and the application rely on the low pressure gas side where the oil storage and produce water tanks will emit vapor, it's actually a rich vapor that's saturated with liquids. So the recovered gas once we remove the oxygen out of that captured gas it is rich gas and it's really a nice premium for the oil and gas companies to recover that and be able to sell that for additional benefit. And then obviously this would be the kind of the routine flaring if midstream operator which is sampling the gas stream to Texas a high parts per million oxygen level they'll shut down the supply line of gas and therefore results in the flaring kind of non-routine flaring of oil and gas companies. So kind of that Dave talked about the dual value proposition, we're excited about that opportunity, it naturally fits within our U.S. Process Solutions business. We have a full portfolio or suite of products for that tank battery and we can leverage not only the EcoVapor existing sales technical sales team, but we have a highly technical sales force that we employ with our power service and Odessa Pumps and also Flex Flow organization. So, we plan to scale the business development and sales opportunities there to get more exposure to denounce customer base where prior EcoVapor's exposure was limited or less just because of it is a smaller company. They were marketing.

Go on Nathan.

I was going to say, yes, it seems like a business that you should be able to grow pretty rapidly with your customer relationships, is there any information you can give us on kind of what level of revenue they are at now and what level of revenue, you think you can grow that to about three to five years?

Yes, I'll give you kind of some summary information. So they're probably in the $12 million to $15 million revenue range at good margins. And I think the opportunity is to put more units in the fleet to favor sales over rental for some of the products, but to grow really I think the sweet spot, would be to grow outside of oil and gas, as we embrace the energy evolution. But it starts off small, but it really, to your implied in your question, I think there's real benefit as we kneel it with our power service business in particular.

Okay. Thanks for taking my questions.

You're welcome.

The next question comes from [Doug Becker from Capital One]. Doug, your line is open. Please go ahead.

Thanks. Dave, I was hoping, you'd expand on what you're hearing from the U.S. upstream customers about activity this year, and particularly given the decline in natural gas prices?

Brad, do you want to take that I think.

Yes, Doug. Thanks for the question. We're obviously in the middle of earning season here, so we're seeing much like many of you customer budgets come out. We're seeing increases year-over-year customer budgets and a lot of kind of built into our 8% to 12% year-over-year revenue guide was really thinking about the drilling contractor. The field is somewhat tight as far as inventory. We're seeing day rate pricing pressure increase, we're seeing tightness there and that's driving inflation that's going to consume part of our customers' budgets. We're seeing completions in frac spreads, rate also limited and tight supply there. So we're thinking more of the CapEx that customers are spending going to be consumed there. Kind of conversely, the pipe mills over the past couple of quarters have kind of caught up the supply to the demand. So we are seeing some kind of deflationary pricing pressure associated with our line pipe which we benefited from last year. So we still think obviously growth is poised for the U.S. market poised for growth. Maybe an immediate concern is how the market is going to respond to lower gas prices that we've seen here recently, still trying to digest that. But taken all together, I think again a larger percent of the customer budgets on a year-over-year basis are being consumed by the products and the labor that we don't sell right now. So kind of our percent of that's pie is a little bit smaller. So we kind of bake that into our guide as Dave noted earlier.

That makes sense, but it sounds like as we sit here today, you haven't noticed any response to the natural gas prices is that make sense?

Yes, I think actually think that's fair. I mean we've seen rig counts decline and I think that's going to impact us, especially in the first quarter. But no, we still, we gauge our near-term outlook on customers' projects that they placed with us versus the projects that are in the pipeline. We look at our kind of order book versus and how that's trending. So we feel like our guide is not a conservative one it's not going to be easy one to deliver in 2023. But, we'll learn more as the customer is put out their budgets. But I think what Brad is trying to say is the bulk of the customer CapEx budget is going to be consumed by day rates and frac crew costs and things that really aren't product costs related, the impacts of oil prices kind of at a five quarter low and gas prices as we discussed. I don't think we've seen the impact yet, but except the rig count, which really is to me the best barometer for our revenue opportunity and that starting off pretty slow this year.

Right. Maybe Mark, what are the assumptions around working capital and the cash flow from operation guidance for the year?

Yes. So that's a great question and I think we're going to work to optimize some of our working capital metrics to try to get some of that balance sheet into that free cash flow number into next year, but again still a growth year. Still, it's still an expectation for us to add inventory to the balance sheet in the coming year. And so, I think as we finished the year. Inventory turns were a little lower than we would have historically wanted as a metric goes, but there were some intentional forward deployment there for some inventory. So I think, as the quarters ebb and flow, especially maybe heavy in the year, we're going to see a little bit of a build there in working capital on the balance sheet.

Yes, let me add to that, Mark. We have really strong working capital turns. In 2021, we had a kind of an era of inventory depletion, which made our working capital turns - eight and almost nine times in some of the quarters. That's changed, of course, because we're still in build mode. The mark-to-market is still going to expand, but we will now be able to see the rate of growth on absolute inventory values and absolute values taper off and then we'll be able to burn off cash in that scenario. So, I think we'll see our working capital turns ease a little bit or be a little less strong, but I think that's just a natural result of a, full we are going to kind of fully stock mode in terms of customer order fulfillment and that's showing in our numbers, but still really good balance sheet management. But there is room for improvement for sure.

Got it. And then just a last one, the pace of share repurchase has slowed modestly during the fourth quarter. Wanted to get a sense for what the thought process was behind? Is it just a byproduct of the buyback program being opportunistic, was it the acquisitions or was it some other factor?

I think you hit it. So we primarily, it, we did two acquisitions in the fourth quarter, we spent $59 million and when we spoke lot opportunistic. Obviously, you want to buy at a good price and buy at the right time and like I've said from the beginning, we want to, we want to execute that program, but the timing was favored the acquisitions we made in the quarter. I think we'll see some increased participation in 2023, but it was really was an opportunity to seize to acquisition opportunities and we jumped on those.

Thank you very much.

Thank you, Doug.

Our final question today comes from Jeff Robertson from Water Tower Research. Jeff, your line is open. Please go ahead.

Thank you. Dave, can you talk a little bit about the strategies for acquisitions and with respect to Process Solutions. Is there a goal in terms of what you would like that to become - as a share of U.S. revenue?

Well, I think, where we're at today is - three quarters in the U.S. energy and approximately 25% is a Process Solutions naturally we want them both to grow and I'd be happy The growth both grew 50% neighbor and the ratios were the same three years from now, but Process Solutions to me, it's primarily a pump business, but a lot more than that it has a level of stickiness with our customers. It puts us in a really sweet spot with core manufacturers - that's I think where we've done our last eight or so acquisitions, because it's a business we simply want to build organically and inorganically. So anyway I think the focus is on bolstering that business because it's, something that's a bit of a departure from standard upstream oil and gas and Process Solutions does afford us some opportunities to grow in the industrial space as well. Now, I've said for my tenure as CEO that we've been less then interested in energy businesses because our energy business wasn't as strong as it is today. So, we'll be looking to grow acquisitions across the board by segment or by business unit, but there's more aftermarket service opportunities in some of these acquisitions were focused on and that tends to be more on the Process Solutions side. So that's why we are putting our acquisition dollars, so far, but that could change. Thanks for the question, Jeff.

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 Brad Wise for closing remarks.

Well, thank you everyone for your questions today and your interest in NOW Inc. We look forward to talking with everyone on the first quarter 2023 earnings conference call in May. Have a nice day. And I'll turn the call back over to the operator. Thank you.

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