DNOW Inc (DNOW) 2014 Q2 法說會逐字稿

Welcome to the Distribution NOW earnings conference call. My name is Dawn, and I will be the operator for today's call.

(Operator Instructions)

I will now turn the call over to Mr. Daniel Molinaro, Senior Vice President and Chief Financial Officer. Mr. Molinaro, you may begin

Thank you Dawn. Welcome everyone to NOW Inc. second-quarter 2014 earnings conference call. We appreciate you joining us this morning, with me this morning is Robert Workman, President and CEO of NOW Inc.; and Dave Cherechinsky, Corporate Controller and Chief Accounting Officer. NOW Inc. operates primarily under the Distribution NOW and Wilson export brands and you will hear us refer to Distribution NOW and DNOW, which is our New York Stock Exchange ticker symbol throughout our conversations this morning.

Before we begin this discussion on NOW Inc. financial results for the second quarter ended June 2014, please note that some of the statements we make during this call may contain forecasts, projections and estimates including but not limited too, comments about our outlook for the Company's business. These are forward-looking statements within the meaning of the Federal Securities Laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially.

No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10 and 10-Q that NOW, Inc. has on file with the Securities and Exchange Commission for more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial operating information may be found within our press release on our website at, www.distributionnow.com or in our filings with the SEC.

A replay of today's call will be available on the site for the next 30 days. It should be noted that, we expect to file our second-quarter 2014 10-Q this Friday, August 8. Later on this call we will answer your questions. I will discuss our financial performance a bit later but first let me turn the call over to Robert.

I want to welcome everybody to our first earnings call as Distribution NOW. Q2 2014 marked the completion of our separation from National Oilwell Varco as Distribution NOW and a standalone public company. When issued, trading began on May 20 regular [rate] trading began on the Stock Exchange in New York on June 2, all under these symbol DNOW.

Today reported revenues for the second quarter 2014 of $952 million, EBITDA $49 million or 5.1% of sales. We [went off] the spin-off of distribution from National Varco on September 24, 2013 and has spent the last 10 months disentangling from National Varco. I can't say enough about the amazing support that we gotten from National Varco through this process and want I to thank Clay Williams, Jeremy Thigpin, Howard Davis and the entire National Varco organization for all the help. We are really excited about our relationship in the past and going forward National Varco and plan to grow it.

As expected, the internal demands and work related to integrating three large distribution businesses, implementing our global ERP system and completing all the work required to spin-off from National Varco has been a disruption for DNOW employees. In addition, to changing all of our global legal entities, relocating our central line pipeyard in the US, moving data centers, integrating warehouse management and MTR systems with a new ERP, and all of the work associated with rebranding and changing signage. We had to replace all of our systems to support fleet, DOT, B2B integrations with customers and suppliers, human capital management and training, facility lease and CapEx approvals, payroll and expense management, [SOC] management, e-mail, numerous other business applications and we had to implement a new web and Internet site.

As you can imagine, all of these activities occurring simultaneously, temporarily interfere with running our business and are having a short term impact on our financial performance. However, there many positive data points I can share, one in particular is that approximately 40% of our business in the US that didn't transition to a new ERP system, as well as all of our international operations, met or exceeded our expectations for the quarter. As well, sells from stock across the entire enterprise were consistent with trends in the market, so the ERP implementation seems to have only had little effect on our contractual day to day business and mainly only affected our project work.

Most notably, outside of the corporate noise, that we've discussed and will discuss further, operations produced more EBITDA during the first half of 2014, even though revenues were considerably down temporarily versus the same period in 2013. That gives us confidence that our incentive plan in consolidation of sourcing is starting to have the desired effects. We're moving as quickly as possible to stabilize the environment and minimize the effects of these massive changes in the coming quarters. Now that we are on a single ERP system, and it's fully implemented and spin-off activities are substantially complete, we fully expect to see marked improvement in revenue and profitability moving forward.

Before we continue with the call, I would like to take a second to thank our more than 5,000 employees for their hard work and dedication over the last many, many months. It is truly amazing what they have been able to accomplish considering all of the things going on in our business. For those on the call that may not be familiar with the business, I thought I'd take a quick second to give a short overview of DNOW before I hand the call over to Dan to review the financials.

We are a global supply chain provider to the energy and industrial markets. We have about 5,200 employees and contingent workers with operations in more than 20 countries supporting sales over 90 countries. We have a legacy of over 150 years operating, beginning in 1862 as Oilwell Supply. We source product from thousands of vendors for more than 40 countries with industry-leading quality control program. We actively manage over 300,000 SKUs in our core product lines our Pipe, Valves, Fittings, Flanges, Maintenance, Repair and Operating goods, Mill Tools, Safety products, artificial lift, electric cable and glands and Production equipment, to name a few.

While Pipe, it represents around 1% of sales, Oilfield Country Tubular Goods -- I'm sorry, while Pipe is a core product line, Oilfield Country Tubular Goods represents around 1% of sales and inventory and the vast majority of that is custom or managed the material. We are a critical link between manufactures and customers through our leading supply chain technologies and those customers include drilling contractors, service companies, oil and gas operators, midstream providers, downstream refineries and chemical plants and industrial manufacturers. We serve our customers from over 300 branches, eight regional distribution centers, export groups, capital project teams, many valve actualization centers and our supply chain services division.

Some of the key highlights that have us excited about our future are the fact that we're a leading distributor in a large growing and highly fragmented market. We're focused on our growth strategy and are now able to increase investment into the business as an independent standalone public company. Now that we are on a single global ERP system, that will enable us to deliver efficient operations, give us global financial visibility and provide a differentiated value proposition to our customers and suppliers. Our business model is highly scalable with low fixed costs and minimal capital expenditures. We have the scale, technology and geographic reach to serve an increasing consolidated and global customer base with our supply chain solutions.

Macro industry trends point to increased activity in all of our key end markets. We even got a demonstrated successful acquisition and integration track record having completed over 40 transactions since 1998. We have attractive cash generation returns through all of the cycles with at the end of Q2, $236 million in cash; no debt, a $750 million unsecured, undrawn line of credit at LIBOR plus 150 with a $250 million accordion.

Unusual, for most IPO's and spin-off, we have a seasoned and experienced Management team, which includes our Executive Chairman, which is Pete Miller, who has been CEO of NOV for the last 14 years and has 18 years with us. I began with the company 24 years ago as a warehouseman and has been President for the last 14 years of this division, Dan Molinaro, who joined us as CFO from NOV, has been with the Company for 46 years and served a large part of his time there as Treasurer.

David Cherechinsky, who has led our finance department as the division of NOV, has been with the Company for 25 years and was leading our finance department for the last 11 years. Then the Executives that run the P&Ls, in both the US and Canada, as well as the gentlemen that leads our supply chain management team that manages our replenishment of branches across all of the world, all started with NOV -- or with DNOW, at least 25 years ago and up to 36 years ago and all started out as trainees, warehousemen, or delivery drivers.

As we move forward, we are going to be focused on completing the remaining projects related to spin and the ERP implementation and be really focused on growing revenue and profitability both organically and through M&A. In late 2012, we made a conscious choice to pause from M&A and focus on the over $1 billion we had invested in this business to integrate CE Franklin and Wilson Supply. We have since re-energized that M&A effort and have a healthy pipeline of opportunities that we are currently pursuing. These opportunities, very greatly in size, but over the last 90 days, we have successfully executed four LOIs in the US and abroad both in energy branches and supply chain services representing over a $100 million in revenue.

Now that we are on one ERP, we will also work to become more efficient in the US and Canada in our corporate offices and began consolidating branch operations where feasible. Our supply chain management team will also be able to manage sourcing and inventory through one system and utilize our distribution center networks to support all operations, which will allow us to leverage the combined purchasing power of the organization and rationalize duplicate inventory. As you can imagine, managing the balance sheet on multiple ERP systems is not optimal, so we believe we can also generate considerable cash by reducing our working capital.

Lastly, consistent with our track record, we believe we can return to historical EBITDA margins in the 8%-plus range, by late 2015 or early 2016. Having said that I'll turn the call to Dan to review our financials.

Thanks Robert. These certainly are exciting times at Distribution NOW being spun-off of National Oilwell Varco Inc. after the market closed May 30, 2014. We began trading June 2 on the New York Stock Exchange as DNOW, one of the largest distributors in the energy industry. We are proud of our history with NOV and will continue to act as a distributor of certain NOV products and will supply products and solutions to NOV. At DNOW, we are excited about our future as a standalone company and increasing value to all of our stakeholders. I join Robert in thanking our dedicated employees as they handled the spin-off, the implementation of the new ERP system, plus the continued integration of two significant transactions, Wilson, which is predominately in the US and CE Franklin in Canada. Robert discussed our business and I will touch on our financials.

NOW, Inc. generated earnings of $27 million or $0.25 per fully diluted share in its second quarter ended June 30, 2014 on $952 million in revenue. This compares with net income of $41 million or $0.38 per fully diluted share in the first quarter of 2014 on revenue of $1.08 billion and compares with net income of $33 million or $0.31 for fully diluted share on revenue of $1.07 billion for the second quarter of 2013. Gross margins were 20.4% in the second quarter of 2014, up sequentially from 19.3%. For the first half, gross margins were 19.8% compared with 18.4% for the similar period last year. EBITDA for the second quarter of 2014 was $49 million or 5.1% of sales, down from 6.1% in the first quarter of this year and 5.4% in the comparable quarter last year.

It is clear that the inward focus on systems, integration and spend impacted revenue in the second quarter and some of these issues may continue during the third quarter. I'm convinced that once essentially completed, it will position distribution NOW as a powerful provider of products and solutions to the energy and industrial sectors, second-to-none.

For the first half of 2014, revenue was $2.03 billion, generating $68 million of net income or $0.63 per fully diluted share. This compares with first half 2013 revenue of $2.14 billion, which produced $74 million net income or $0.69 per fully diluted share. Looking at operating results for our geographic segments, revenue in the United States was $662 million in the quarter ending June 30, 2014, down 6% sequentially and down 11% compared with the year ago quarter. For the first half of 2014, US revenue totaled $1.37 billion compared to revenue of $1.45 billion in the first half of 2013. Short term challenges relative to the rollout of our ERP system contributed to the sequential revenue decline.

In Canada, second quarter revenue fell 35% to $125 million as seasonal breakup coupled with previously mentioned ERP rollout issues adversely impacted operations. Project work bound for the oil sands in 2013 was not repeated in 2014, thus accounting for revenue reductions. The decline to the Canadian dollar relative to the US dollar was also a contributing factor in the reduced revenue. Revenue was down 27% from Q2 2013 and Canada revenue of $316 million for the first six months of 2014 was down $71 million versus the same period in 2013.

Sales slowed as is typical with breakup in Canada but hit late this year with the thaw not coming until early April. Wet spring weather extended through the entire quarter. Declines were steeper for Western Canada than typical based on the timing of production asset sales by key customers. These divestitures created a slowdown of activity in both selling company and acquiring company. Wet weather and flooding in Manitoba and Southeast Saskatchewan is hitting the oil industry hard as the ground is too wet to drill. The majority of the wells were shut down during the flooding and roads are still too damaged for trucks transporting oil and equipment. As such, there was a steep decline in the number of wells drilled in this region.

Our largest revenue declines in the US and Canada were in Pipe and Valve, with Pipe being double the amount of decline versus Valves. A portion of the reductions came from expected impact related to an ERP rollout where the quotation staff were distracted, either by learning a new system or by being in ERP training. Therefore, they weren't able to meet deadlines for project bids. Also, our Pipe division that sells large quantities of Lange pipe to the midstream segment experienced margin pressure and passed on opportunities because they didn't meet our profitability expectations. The [enquiry] level for Pipe in the first quarter of this year exceeded expectations. However, the second half of Q2 2014 saw falloff in the enquiry level.

We still see relatively low gas prices that make investing in infrastructure less attractive. The benefits that rail is now showing, including speed and flexibility, there is less urgency to quickly build infrastructure. Pricing continues to be very competitive, material is arriving from imports in addition to there being short lead times from domestic sources. We found that several mills still had excess inventories that we were not able to reduce in the first quarter. We are maintaining a fairly conservative inventory level at these lower volumes. The market has not shown the growth needed to increase our inventory position.

International revenue was $165 million in the second quarter, down 9% from the first quarter due in part to large non-repeated valve projects, compared with the second quarter of 2013, international revenue was up 6%. For the first half international revenue was $347 million, up $46 million over the first six months of 2013. We are very encouraged by the broad based growth spanning all international areas, most notably in the Middle East and Asia, areas which led to these year-over-year increases. Revenue channels for the first half of the year remain in the same relative position as last year, with some 83% through our energy branches -- or stores as many of us know them, which includes our Pipe group as well, and 17% through our supply chain locations.

Looking at our income statement operating and warehousing costs were $105 million and $207 million for the three and six months, ended June 30, 2014 respectively. This compares with $103 million and $204 million for similar periods in 2013. These costs include branch and distribution center expenses. SG&A expense was $45 million and $89 million for the three and six months of 2014, compared with $40 million and $79 million for the corresponding period of 2013.

The increase related to the net incremental costs incurred in connection with spin activity, as well as preparing to operate as an independent company. We estimate that spin related standalone costs in the first and second quarter were $3 million and $9 million respectively. These costs include executive compensation, information technology, global insurance, public company fees, including the Board and other charges. In Q3, we believe there could be an additional $4 million but it should be noted that some of these costs are by contractors and consultants for example tax, IT, HR, et cetera. We hope to get some relief when we have our own staff in place later in the year.

As we've communicated, we are confident that cost savings from the integration of Wilson and CE Franklin will offset a good portion of these corporate costs. Effective tax rate for the second quarter of 2014 was 37.4%, which reflects certain true-ups required from prior year tax returns. The effective tax rate on continuing operations for the first half of 2014 was 35.6% and we expect it to be close to the US Federal Statutory rate of 35% for the full year.

Turning to the balance sheet, NOW, Inc. had working capital of $1.4 billion at June 30, 2014, which included inventory of $882 million, accounts receivable of $773 million and cash totaling $236 million. Cash was up $61 million during the quarter with about half of our cash located outside of the US. CapEx during Q2 was $12 million with six month expenditures at $18 million, the majority being spin and integration related. Free cash flow for the first half of 2014 was $97 million. Our current day sales outstanding are in the low 70s reflecting the short term effects of our systems implementation on collections. We've plan to get our DSOs closer to the 60 day range soon.

Inventory turns were 3.5 times, also impacted by the ERP project but believe will return to at least 4 turns soon. Days payable outstanding are now running in the upper 40s. Working capital is 34% of sales and has been running around 30% with our objective of getting to a 25% rate. The single ERP system will be an effective tool to accomplish these improvements, thus freeing up additional cash. We entered into a five-year unsecured $750 million revolving credit facility with a syndicate of banks, led by Wells Fargo, which include the $215 million accordion provision. We presently have no borrowings and this dry powder, coupled with our cash balance, gives us well in excess of $1 billion, as we consider growth opportunities for DNOW.

Looking ahead to the third quarter, we see continuing internal noise as we complete integration steps relative to Wilson and CE Franklin and finalize cleanup items relating to the implementation of peripheral systems. However, we have confidence in our strategy, in our employees and in our future as we position NOW, Inc. to continue to serve the energy industry with quality product and services. We are an organization with a strong financial position and we believe the spin-off creates new opportunities for us. With that Dawn, let's open it up to questions.

(Operator Instructions)

Dave Manthey, Robert W Baird.

Hi, thank you very much, and good morning.

First off Dan, I was wondering if you could provide us operating income by geography, do have that this morning or do we have to wait for the Q on that?

I have that, operating income by geography, again operating income for the quarter was 4.5%. The three reporting segments we have, the US was 4.2%, Canada was 1.6%, international was 7.9%. Giving us a grand total of 4.5% for the quarter, Dave.

Okay, thank you.

Then, on the operational issues, I'm wondering, in terms of the slope of the line, as that improves. Can you talk about July trends, are they getting back to normal as you rectify these issues and will we have them up fully sorted out, let's say starting in the fourth quarter?

I'm interested in your comment about the stock sales being consistent with the market and I'm wondering typically you should be growing faster than the market with some low to mid single-digit share gains. Can you talk about how the trends are playing out and when you see these issues being sorted?

Dave, this is Dave Cherechinsky.

Regarding the timing of working out some of these bugs in the system, we think it will take all of Q3 to get things under control and then there will be some peripheral system issues that we hone in the fourth quarter. There are various issues that complicated activity, like we discussed, but we will make great headway during the quarter to resolve those but there will still be some lingering issues in the fourth quarter.

Don't forget Dave, Canada went live at the end of the quarter, so the last two months of the quarter, the two big segments went live on the new system, so they felt the brunt of the impact of the rollout; whereas, the US went early so they were able to make up some ground during Q2.

That is right.

You're saying ideally by the beginning of 2015, entering 2015, hopefully the growth equations, sort of market plus share gains should be back on track with these issues behind you?

Yes. I think I've shared that explicitly on the road the entire time I've done road shows.

We fully believe -- if I'm talking about ERP or spin, in 2015, pleased shoot me. Hello?

Are you still there Mr. Manthey?

I'm all set thank you.

I think the "please shoot me" got him.

Matt Duncan, Stephens and Company.

I know this may be a little bit difficult to do, but is there any way to quantify what you think the revenue impact of all of this noise might have been in the quarter, so we can get a sense of what growth might have looked like without the disruptions?

Matt, this is Dave.

Yes, we did some modeling, these are pretty rough, but we looked at same store sales where no change occurred, no ERP transition occurred or no software issues occurred and we saw growth consistent with what we'd expect for the quarter.

Then, we looked at locations where changes occurred and that's where we saw the drop in quoting, in material search for products, et cetera, and we saw a market decline. With that, we estimate revenues loss for the quarter could be in the $40 million to $70 million range, that is pretty rough. It's pretty meaningful, but that's our best guess based on how we did the analysis.

You can pretty much figure out for yourself, Matt. The US, had they not got through a spin in ERP implementation should have met or exceeded Q1 and Canada normally goes through a 20% to 25% decline in a break up and they went to a 35% decline, so you can do some ratios and figure out pretty close what you think the revenue loss was.

The good news is that the revenue loss was project work not contractual day to day work. So a project order comes in today and we lose one tomorrow, we win one the next day, so it's not hard to make up ground on project work.

Dave, can you tell us what the growth rate was in those locations, it's the same store sales and locations where there were no changes, what was the growth rate like in those locations?

We did the analysis for the US business and the growth rate was consistent with rig count.

All right, that helps.

What about the pipe yard moved? How much do you think that would have impacted revenues and is that included in the $40 million to $70 million impact number or is that above and beyond?

That is included in the number. We -- we're basically in a large yard that Wilson has been in forever, I don't know how long, but quite a while, here in Houston, that we had to move out of for multiple reasons. During that move, all that material was unaccessible for the branches, so it affected all of our segments, that couldn't get pipe out of the yard.

Last thing and I will hop back, just on this sort of growth expectations we should be thinking about for the balance of this year. Do you guys think you're still going to be seeing revenue declines for the remainder of the year before you go back to growth next year, given that your this you still got the lingering noise?

No, absolutely not. We won't see a revenue decline in the third quarter. We're expecting growth in the mid to high single-digit range in the third quarter with growth in all three segments.

We continue to see strength in our drilling and MRO product lines, those not as susceptible to quoting. We'll see an improved and we're seeing an improved level of quoting in the PBF area, but there's one caveat and that is pipe.

As it stands today there still a lot of oversupply, there's a lot of aggressive pricing and we simply haven't been willing to entertain some of the margins that selling the pipe at these levels would require. One wild card is pipe but we will grow in the third quarter.

Dave, on that point, one of your big competitors had a pretty big lime pipe revenue quarter. Is it your impression I guess then that they're willing and maybe to take the lower margins and that you guys are avoiding right now? What are the gross margins like that you're seeing on project bids in lime pipe today?

Well, Matt, project pipe, large orders typically go into mid single-digit range and we're bidding those orders at the same level today we have forever and we are winning a lot fewer. Whose winning them? I have no idea, you have to look at their P&L to determine that on your own but were definitely not winning them and we're not take them in low-single digits.

We have been saying that on the road and we're not going to change the strategy that we communicated since we hit the road, Robert, that we're going to keep our standards here and we're not going to drop down to the lower margins just to get revenue.

Okay, all right, thanks guys, very helpful

Vaibhav Vaishnav, Bank of America.

Dave, I believe you just mentioned about mid to high single-digits revenue growth in the third quarter, with growth in all segments. How should we think about the margins and what I really want to ask is, I think we touched upon it, that how much of the incremental $45 million of OpEx is already reflected in second quarter and how much it could be incrementally in the third quarter?

Regarding margins, we've seen nice progression in our gross margins over the last couple of years and in the most recent quarter. We attribute that to how we source and move products through the supply chain today and our incentive program that we've talked about on the road.

Margins were up a little higher perhaps, in the second quarter, given the loss of the project volume that we've talked about on this call. As that business comes back, we will see a little bit of dilution of the margin on the project business but we still expect strength in our core stock sales, like Robert talked about.

Second question about incremental corporate costs, we think they'll be about $4 million higher in the third quarter than what they were in the second quarter.

Somewhat dilution from project work in gross margins but incrementally high operating of $4 million.

Even outside of project work, the margins have consistently been improving, so I don't expect that to stop necessarily.

Okay, that's helpful.

Given that we are at about 5% EBITDA margin for this quarter, if you can help us bridge the gap between where we are today to eight plus EBITDA margins target by early 2016. What are the bigger bucket items, if you will, to get us there?

It's the two things we talked about on the call, which is our incentive plan and finally being able to leverage the sourcing of material for all the branches together. Because up to this point, for CE Franklin Wilson and Heritage National Oilwell, we've managed our supply chain separately. We have not been taking advantage of the distribution centers for National Oilwell Varco, per se, the Heritage group, because of being a multiple ERP systems, we could not manage those transactions. We would have to higher two floors of accountants to deal with all the reconciliation, so we've not done that.

Now we can, and we will, and that will help drive base margins. And incentive plans is starting to take hold. We've got lots of data that shows that starting to occur at the branch level. And then obviously not run one ERP, we need to -- not just we need to, we're going to get efficient at corporate and at the branches.

We've got multiple facilities in many towns, and we have a very inefficient headquarters in both US and Canada. There is a lot of things we can accomplish now that we could it before because of the ERP. All of those things combined help us drive our margins back up.

The last one for me, if I can squeeze that in, can you talk about the M&A pipeline that you see your strategy on preference industry with this energy sector and any timeline that we can expect? Where I'm coming from is, given that you guys are focused on ERP implementation and hiding a bunch of support staff, does that put M&A line further along down the line?

We re-energized our M&A effort a couple months ago. We had several dozen in the pipeline before Wilson and CE Franklin, we put it in the drawer, we dusted it off recently and re-energized and it is back up to a couple dozen or more. They are in all sectors and in all geographies based on either a wanting to sure up our participation in markets, where we don't hold a fair share position or strengthening places where we are a pretty active player.

I would say the current opportunities represent improvement in all of those areas, with respect to how they would fit our strategy and with respect to timing, it's all about be opportunistic. So if four or five opportunities come up that fit our strategy and our financial models and we have a willing seller, we will do all four or five of them. If we see none of those, that meet those expectations in a quarter or two, we will do none.

We are going to maintain our discipline financially around what we do and don't acquire and we will be opportunistic and we are not limited, based on the work that is going on elsewhere in the organization because we have substantially finished all of our rollout and our spin. Our organization can accept whatever it is that comes our way that we have an opportunity to take.

Robert had mentioned that we have four LOIs now and it's important to know that this money isn't burning a hole in Robert's pocket. We're going to keep the discipline that we really earned from the NOV corporate development days and we know how to value companies and do the due diligence.

We know how to walk away, so if you don't see us doing anything it doesn't mean we're not active as heck on the M&A side. We clearly are.

I would say Vaibhav, we've walked away from more than we've signed, in the last 60 to 90 days.

Sounds good, that is all from me, thank you.

Hamzah Mazari, Credit Suisse.

Good morning, this is Flavio Campos on behalf of Hamzah. Just wanted to ask if you guys can give us some more color on the breakdown between how much of your revenue is contracted and how much of your revenue is project based, just so we can gauge the impact of project in the quarter?

It is really hard to say because a lot of the -- of all of our product revenue was within one group that be easy to measure, but it's not. Our branches get engaged in doing project bids as well.

If I had to give you just a gut call on how much of our business is contractual day to day versus project, I would say it is about half and half, but I could be off. That's just totally a gut call.

That's very helpful.

Did you see any difference on health between upstream, midstream and downstream clients or was this ERP affecting all of them equally?

I would say, since the Heritage National oil group was the one that was least effected, that's all upstream business. It was affected less than Wilson and CE Franklin, who have some downstream and project line pipe groups.

The downstream business and the lime pipe midstream business and portions of CE Franklin were the ones most affected, because they are the ones that went to the change. We actually implemented, we actually built a brand-new platform, SAP platform, and moved Heritage National Oilwell in Q1 and saw almost no impact.

It's really in the business that CE Franklin around because they're the ones that had to go through learning a new system, training and all the things associated with a rollout.

That's great. That's very helpful.

Switching to M&A very quickly, you mentioned that you have about $100 million in revenue already in the LOI stage, but how strong -- can you give some color on how strong the overall M&A pipeline is right now, in terms of revenues and also some comments on how are multiples out there and what your thought around multiples paid for these businesses?

We're still in the range that we've always stated. There are opportunities that we've come across that either we passed on or are still in the pipe line that range from something really small, $10 million of rev, that has a strategic fit for us or hundreds of millions of dollars of revenue.

It's a broad range and our multiple discipline has not changed since we've become a standalone public company. So generally, when we go after private companies, is in that 4% to 6% range, and if we come across something that's public or PE owned, I'm sure will go more consistent with what you've seen in the market.

Perfect, that is all for me, that was very helpful. I'll jump back in queue.

(Operator Instructions)

Chuck Minervino, Susquehanna.

Hi, good morning.

I just wanted to get a little more color around the margin pass into 2015. I think you highlighted some of the key elements on the cost side. Does any of that goal number of around, I guess call it around 8% or so, do you have any composition of your revenues that's required to get there, maybe a higher element of the supply chain business or certain product line sales that are higher margin, kind of to reach that, or is this predominantly all internal cost reduction and those other things that you mentioned earlier?

It's a myriad of things Chuck. We've been there twice before and we actually never topped out. When we got to the 8% plus EBITDA range in 2008, then 2009 happened and we dropped, with everybody else in the market. And then when we got back there again in 2012, we dropped and we diluted our P&L with CE Franklin and Wilson.

It's less about the size of the orders or the type of the products or the divisions and more about culture. Wilson has a lower cost supply chain then do we, and we've yet to tap into it and we're starting now to run one ERP, that will help.

Wilson and CE Franklin had a bit of a different culture with respect to how they measured success rate on orders and revenue and customers, which is more focused on returns as opposed to EBITDA margins, when we actually focused on both. And I think that culture shift will change and is occurring now. There on an incentive plan that focuses on both.

I just think the shift of taking advantage of the supply chain and changing our culture around how we look at opportunities in the market, like passing one big pipe orders in Q2, that were low single-digit margins that, typically, one of those two companies would have taken in the past, will be what drives our margins up.

I don't know if you can help breakdown 2Q a little bit more. I know you get some seasonality there in Canada, but maybe more on the US side, just given that there was a decline in revenues and I know you mentioned a number of the reasons why.

If you looked at the months in 2Q, can you tell us how you exited the quarter, how was June relative to the other two and does it put you on a pretty good pace for 3Q, 4Q here?

I would say, obviously, we rolled out Heritage Wilson in the first month of the quarter and then two groups in Canada on the second two months of the quarter. Wilson was fairly large revenue base, obviously, so the biggest impact from a revenue perspective was in April and they steadily progressed out of it.

Now, Canada is starting to progress out of it as well, so I would say it was a continual improvement through the quarter. We believe it's going to continue through Q3 and beyond, so it's not been choppy with respect to recovery, it's been a steady recovery.

Got it, thank you.

Will Thompson, JPMorgan.

I just want to touch -- I think you in your prepared remarks mentioned about 40% of your business didn't transition to ERP. I just want to clarify, is that business already on the ERP platform or is that transitioning in the third and fourth quarter?

We have three major ERP's that we reviewed when we made a decision to go to the one we are on now. Heritage National Oilwell was on the current ERP system we have now, so when we built the new system because we obviously have over 14 years have created a lot of custom codes, so we thought if we're going to do this, let's do it right, so we built their new platform that was a lot cleaner and had a lot less of our own adjustments inside the system itself.

We moved Heritage National Oil Distribution through that new platform in Q1, so it was very little change for them because that was the same operating system they were already on. That is the 40% of the US and all of international, and probably, I'm guessing, a third or more of Canada that moved to that new system that didn't go through the same learning curve that everyone on Oracle, which is Wilson, everyone on JD Edwards, which was CE Franklin went to.

Okay, that is helpful.

I know your prior filings mentioned about $45 million in incremental SG&A associated with being a standalone public company. I want to tie back to your comments on the (inaudible) $4 million in incremental corporate cost. Is that consistent with that prior number of $45 million?

We had $9 million in the second quarter and we've said we think we're going to have another $4 million in the third, so that run rate would take us to $45 million or greater actually. But we also think we have some cost to contractors, consultants and others that will be more expensive to us then when we have our own staff.

An example is, my tax staff, our tax work is done by Deloitte for us and as we put our people in there that we are doing as we speak, it will be less cost. That will get you close to the run rate of $45 million.

Also, we still have lots of staff in here that are outside, either contractors or consultants, that are working on all of this clean up with the ERP system that will eventually go a way as well.

Okay, I just want to make sure it was apples to apples. Lastly, if I can sneak one more in, on capital spend. Can you help us understand what the year will look like and what the focus of that capital expenditure will be?

Last year, our CapEx was in the $50 million plus range, that's a whole host of things that are related to either ERP spend, and we think this year will be similar. We think starting next year, it's going to drop back down in the $10 million to $20 million range probably closer to $10 million than $20 million, so it's a very low CapEx business.

We built a new campus to get out of 10 buildings in Houston, we didn't know when we spun, until after we spun, that you can't share a facility with a third party in Jebel Ali free zone and so now we're paying a fee to the JAFZA area, so we can be the same building with NOV, now that they are a third party. We have to build a new building. We had to do something up in Canada.

All of this stuff is one time stuff that we don't normally do and I would fully expect our CapEx to get back down to $10 million to $20 million range.

We think most of the $18 million that we have incurred for the first half of this year is all spin and everything else too. So, as you say, the $10 million to $20 million range and probably closer to $10 million right now at the pace we're going.

Before we acquired CE Franklin and Wilson, this was about almost a $2 billion business. Our CapEx ran $3 million to $5 million a year, I mean that is not much of a CapEx business.

That's very helpful, thank you.

Matt Duncan, Stephens and Company.

Another couple quick questions to help us think about the third quarter.

Dave, what was the sales number in the third quarter of last year? Just to help us know what that mid to high single-digit growth is off of.

Matt, I don't have that handy right now. We can take it offline, I can get that number.

Okay, that would be helpful.

Then, the energy branches versus supply chain revenues in the quarter. Dan, I think you may have mentioned this in your prepared comments but I didn't catch all of that. What was the revenue dollars from the two?

I don't have -- the dollars I do have actually. But the important point Matt is, through the last year or two talked about 83% of our business was energy branches and 17% was supply chain. That percent stayed right on the mark for our first of this year.

The revenue for the quarter of $952 million, $785 million of that was energy branches and $167 million was supply chain. For the six months maintained at 83/17 ratio, Matt.

Okay, last thing Robert, going back to M&A for a second, what are the multiples that you guys are seeing right now? What are the multiple expectations of targets? It sounds like with four LOI's with a little over $100 million in revenue, those are all obviously smaller acquisitions. Are the multiple expectations on the high side right now for bigger properties?

They're all private deals and they are in that 4% to 6% range that of always talk about, maybe closer to 6% but definitely still within that range.

What are you seeing from others that maybe aren't getting through the filter? Are the multiple expectations a little bit high on the bigger properties right now?

Yes, the ones we've walked from have been very high single digits, if not double digits and we definitely will walk from those deals.

Alright, thanks, guys.

I'll now turn the call over to Robert Workman, President and Chief Executive Officer, for closing remarks.

Thanks everyone for participating in the first Distribution NOW earnings call. Thank you for your interest and we look forward to talking to you again about the third-quarter results.

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