Good morning. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would like to hand things over to Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations. You may begin your conference.

Well, thank you, Ian, and good morning, and welcome to DNOW's first quarter 2024 earnings conference call. We appreciate you joining us and thank you for your interest in DNOW. With me today is David Cherechinsky, President and Chief Executive Officer; and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate under the DNOW brand, which is also our New York Stock Exchange ticker symbol. Please note that some of the statements we make during this call including responses to your questions may contain forecasts, projections and estimates, including but not limited to comments about the outlook for the company's business. These are forward-looking statements within the meeting of the U.S. Federal Securities Laws based on limited information as of today, May 10, 2024, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume 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 DNOW has on file with the U.S. Securities and Exchange Commission for 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, 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 DNOW Inc. excluding other costs and diluted earnings per share attributable to DNOW 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 reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure, and the supplemental information available at the end of the earnings release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the first quarter of 2024. A replay of today's call will also be available on the site for the next 30 days. We plan to file our 2024 Form 10-Q for the first quarter later today, and it will also be available on our website. Now let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I'm incredibly pleased with the progress we made in the first quarter generating strong free cash flow of $80 million towards our $150 million full year target, which we expect could now approach $200 million in 2024. Free cash flow is represented by cash flows from operating activities reduced by capital expenditures made during the period. Our enhanced free cash flow dynamics are the result of DNOW's pedigree of sound balance sheet management supported by a strong transformed business on a path that could make 2024 our best year yet. Assuming an increase in market activity as modeled, and that is on top of a record EBITDA margin years in 2022, surpassed again in 2023, we believe 2024 could top that yet again. Our quarterly cash haul was much better than expected as we guided to negative free cash flow in the first quarter, but instead generated $80 million in free cash flow in 1Q '24 and $262 million in free cash flow over the last 4 quarters, the best trailing 4 quarter period of cash generation since 2016. In the first quarter, we were privileged to welcome and onboard Whitco Supply to the DNOW family, one of our largest acquisitions yet and we still ended the quarter debt free with $188 million in cash. The addition of Whitco's talented team, rich culture and technical expertise enhances our service levels and capabilities, enabling us to better support our customers midstream and energy evolution investments. With our first U.S. Energy Centers acquisition since 2015, Whitco Supply expands our U.S. footprint and customer base across the midstream energy sector. Whitco operates 8 locations where they've carved out a devout customer following and effectively deploy a Supercenter like strategy where the main active centers of commerce…

Thank you, Dave, and good morning, everyone. Total first quarter 2024 revenue was $563 million up 1% or $8 million from the fourth quarter of 2023. EBITDA, excluding other costs or EBITDA for the first quarter was $39 million or 6.9% of revenue. U.S. revenue for the first quarter 2024 totaled $435 million, a $17 million increase or 4% higher than the fourth quarter of 2023. Year-over-year U.S. revenue increased $8 million or 2% from the first quarter of 2023. The U.S. Energy Centers contributed approximately 70% of total U.S. revenue in the first quarter, and U.S. process solutions contributed approximately 30%. In Canada, for the first quarter, revenue totaled $66 million, an increase of $1 million or 2% from the fourth quarter of 2023. International revenue for the first quarter of 2024 was $62 million, down $10 million or 14% sequentially. Gross margins for the first quarter were 22.9%, down 20 basis points from the 2023 average, driven primarily by $1 million in inventory step up amortization charges related to the acquisition attributing to the decline. We estimate the remaining $4 million in inventory step up charges will be recorded in the second quarter, temporarily impacting gross margins in 2Q. And I want to highlight, we exclude these acquisition related charges when computing our non-GAAP measures like EBITDA and net income and EPS, excluding other costs. Gross margins declined 50 basis points from the fourth quarter level, considering the 1Q acquisition purchase accounting impact mentioned earlier, 20 basis points and the expected margin decline from non-recurring fourth quarter projects and year-end vendor consideration impacts. Warehousing, selling and administrative or WSA for the quarter was $101 million up $3 million sequentially, primarily related to the acquisition that closed late in the quarter. We forecast the second quarter WSA level should…

Thank you, Mark. Now switching to our outlook for the second quarter and full year 2024. We are encouraged by our prospects for the remainder of the year and are upgrading our 2024 full year outlook assuming increased market activity. We expect sequential second quarter growth in the U.S. and international. And in Canada, the expected seasonality will drive sequential revenue lower. Canada's revenue historically declines approximately 20% sequentially from the first quarter due to the second quarter breakup. However, due to the weather implications I mentioned earlier, that impacted our Q1 '24 revenue, we believe the sequential decline could be less. Taken altogether, we expect DNOW second quarter sequential revenues to increase in the 10% to 15% range from 1Q '24. And for the full year of 2024, our view is to increase revenue in the mid-to-high single-digit range compared to the full year 2023 revenue. And our 2024 full year EBITDA percent of revenue would be similar to full year 2023 EBITDA's percent of revenue. As mentioned earlier, we are upgrading our prior $150 million full year free cash flow target, which we expect could now approach $200 million in 2024. So to close, this month marks an important milestone in our company history. May 30 will be our 10-year anniversary as a publicly-traded company, and today I'm excited to unveil DNOW's new brand and logo. Together we embrace the new symbol, knowing that it represents seeds planted in 1862 when we were founded, but more so to where we are heading. Our journey began with a vision to redefine DNOW, not just financially, but culturally as we align around our ethos, inspire one another, delight the customer and fuel the future. Beyond its visual appeal, our new logo tells a new DNOW story, a story of growth, transformation and an exciting future. As we execute on our strategy to leverage our solid position in upstream and midstream markets, achieve leadership and energy evolution, expand our presence in adjacent industrial markets and leverage M&A as a fuel for growth through an accumulation strategy. Our new logo serves as a beacon to who we are and what we stand for. With that, let's open the call for questions.

[Operator Instructions] Our first question comes from the line of Nathan Jones with Stifle.

I guess I'll start with some of the obvious questions around the Whitco acquisition. Now that it's closed [ $185 million ] purchase price, can you give us some details on what the annual revenue is? What the margin profile is? And I guess what the plans are for improving their business, leveraging your supply chain, leveraging the business model, et cetera?

Okay. I'll attack those questions this way, Nathan. So the purchase price was around $185. The multiples are probably in the [ 5, 6 ] range, given where the market is right now. Their EBITDA performance as percent of revenue is similar to ours, maybe a little bit stronger and their working capital turns are a little bit slower based on their accounts payable profile. But from a P&L perspective accretive, good strong multiples on the business. They contributed -- we said in our opening comments that the U.S. business grew by $17 million and we bought Whitco. It was kind of a stub period last couple weeks of the quarter. They added about $17 plus million in revenues. So they have parallel performance metrics with us, maybe a little better on the P&L. And in terms of what we're going to focus on as we onboard the business, our primary and almost solitary focus is going to be around revenue synergies. So they have a heavy midstream component, which is in the 60% to 80% range of their business. They do business with a lot of customers that aren't our top 25. So that's a real opportunity for us. So we have limited overlap on our customer lists. So we're going to, in the case of Whitco, be able to introduce our wide ranging and ever-growing process solution brands and our fabrication competencies to Whitco. That's going to be a big thing for us. We'll be a little more important to the suppliers and we will -- that'll work to our advantage. But the main thing is their ability to penetrate customers and our ability to do the same with other customers and how do we synergize that. In terms of the balance sheet, I think I mentioned that, but what else -- Anything else I missed there? Nathan?

No, I think that answered the questions. I would be interested in -- maybe it's a little too early to tell given you've only owned it for less than 2 months here, but I think the information around the revenue synergy potential going forward, maybe when you have a better handle on it will be good. I guess my follow up question then has to be on the free cash flow generation, which was extremely strong in the first quarter. Can you maybe talk a little bit more about the main contributors to the cash flow number, given that 1Q is usually a seasonally weak quarter, usually consumes cash, not produces cash?

Yes. So about half of that -- And just for context, of course, we guided -- to your point that we would consume cash in the first quarter. We generally kind of tighten our belts at year-end and generated as much cash as we can and clean up old receivables and those kinds of things. Half of that contribution was from earnings and the other half was from improved organic accounts receivable. So I think our organic U.S. DSOs went down by 3 days. So real nice improvement in collections and that really helped. In terms of the prospects for the full year being increased, well we've now since closed Whitco, they'll generate potentially in that $30 million to $50 million range or $20 million to $50 million range. All of this is going to get murkier as we go through the year. And we -- our legacy business was -- and the year was off to a slow start, so we didn't generate the kind of revenue growth on our legacy business as we expected. So we certainly generated some cash there in the first quarter, but we're very excited about achieving some momentum here with hopefully some increases in rigs going into the second half and completions, which were down 11%, sequentially bottoming and growing as the year goes on.

Our next question comes from the line of Max Kane with Stephens.

So first question is on 2Q and 4-year revenue guide. I appreciate the color you all gave on the embedded assumptions for 2Q revenue, but I mean, how should we be looking at the rest of the year? Should we be assuming a typical sequential slowdown in 4Q and just, yes, once again, could you maybe just reiterate what the drivers were for 2Q revenue step up? I'd appreciate that.

Yes, I think if you look at what we're expecting going into 2Q, of course the bulk of that growth is going to be the addition of a full year quarter for Whitco. So the great majority of those revenue gains will come from Whitco discreetly. We're going to see some growth internationally. We're going to see a seasonal decline in Canada. As I talked about in my opening comments, those will largely offset. We'll see some growth in our energy business in the U.S. and flatness primarily in our process solutions business. If you recall last year, our process solutions business grew 46%. They're at a very high run rate. They're maintaining that level. So we expect kind of a meager gain there. But most of the contribution in the second quarter is Whitco. We expect summer growth and emergence from breakup in Canada in the third quarter. So that'll be our best quarter of the year. And then we do expect a seasonal decline. Whitco experiences a seasonal decline as well. So those will be the contours. We often see Q2 being very similar to 1Q, but that won't be the case, of course, because we'll have a full quarter of Whitco contribution.

And what has given you all confidence on margins improving throughout the year?

Well, the margins we posted -- Mark, you want to talk to that, because some of that includes accounting for the acquisition, but you want to give some color on that?

Yes, that's correct. Yes, the first quarter included about 20 basis points for inventory step up, just part of the purchase accounting.

Negative impact.

Negative impact. And due to the partial quarter, that'll flush out fully in the second quarter. So we do expect the [ face ] to return to kind of where they were full year average last year in 23%.

Probably in the third quarter, righta?

Right, in third quarter.

Our next question comes from the line of Jeff Robertson with Water Tower Research.

Dave or Mark, can you talk about any cost synergies with Whitco as you -- since you mentioned they follow a Supercenter model similar to DNOW? Are there overlaps or basins that you can bring them into or go in where they're strong and create some cost synergies?

Yes. Our focus for Whitco is on revenue synergies. Like I said earlier, the customer lists are different. The focus is different. We want to grow market share where we're really strong in upstream and where they're really strong in midstream. So while there might be some cost savings opportunities for us to leverage each other's facilities, service models, sales talent, that's not our objective with Whitco. With Whitco, we want to drive a pure revenue synergy play where we might see some "cost savings" is on the product side. We expect to see some of that, especially for pipe and some valve brands where we're a big buyer and we overlap with them on the supplier side. But our objective is to grow, take market share in this kind of sideways market and invest in the infrastructure to do so. And we did so with Whitco.

Is the revenue opportunity with -- to expand DNOW's business with Whitco's customers, is that margin enhancing in terms of the product mix that those types of customers would need DNOW to supply?

It could be. I mean, we're having a lot of fun and interest certainly from the Whitco side and introducing some of the process solutions opportunities to their customers. We're starting that. We're pretty new in the onboarding process. But we see opportunities there. Process solutions at this point in the cycle tends to have a little bit better margins. So that could be margin accretive to the extent we can introduce our process solutions branch to the Whitco customers.

And then lastly, does the addition of Whitco alter the types of acquisition or types of product lines that makes sense for DNOW in terms of industrial logic or the type of things you might be looking for?

Very good question. So Whitco is our first Energy Centers acquisition since 2015. We've been careful to really focus on process solutions. We made 10 process solutions acquisitions in a row. I think that's where you'll see most of our investments being made going forward. Whitco is different. This is a company that grew over a 20-year period to be a powerhouse in midstream. So they're very specialized. They have a devout customer base, like I said in my opening remarks and they have a special quality to them that you don't really see with all distribution pipe, valves, fittings distributors. So this was a kind of a -- timing is right. It was a great opportunity. And I think you'll see most of our acquisitions in the near-term anyway being pumped and process solutions-oriented.

There are no further questions at this time. I would like to turn the call to call back over to Mr. Brad Wise.

Well, thank you for your questions today and your interest in DNOW. We look forward to talking with everyone on our second quarter 2024 earnings conference call in August later this year. Have a nice day, and we'll turn the call back over to the operator.

This concludes today's conference call. You may now disconnect. Have a good day.