DNOW Inc (DNOW) 2014 Q4 法說會逐字稿

Welcome to the fourth-quarter and 2014 earnings conference call. My name is John and I will be your operator for today's call. (Operator Instructions). I will now turn the call over to Senior Vice President and Chief Financial Officer, Dan Molinaro.

Thank you, John, and welcome, everyone, to the NOW Inc. fourth-quarter and year-end 2014 earnings conference call. We appreciate you joining us this morning and with me this morning is Robert Workman, President and CEO of NOW Inc., and Dave Cherechisky, Corporate Controller and Chief Accounting Officer.

NOW Inc. operates Primarily under DistributionNOW and Wilson Export brands and you will hear us refer to DistributionNOW and DNOW, which is our New York Stock Exchange ticker symbol, throughout our conversations this morning.

Before we begin this discussion on NOW Inc.'s financial results for the fourth quarter ended December 31, 2014, please note that some of the statements we make during this call 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 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 US Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.

Further information regarding these, as well as supplemental financial and 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 plan to file our 2014 Form 10-K later this week and it will also be available on our website.

Later on this call I will discuss our financial performance and we will then answer your questions. But first let me turn the call over to Robert.

Thanks, Dan. Welcome to DistributionNOW's Q4 2014 earnings call. Before I get started I want to acknowledge our global team of DNOW employees, those who have been with us for just a short period of time as well as those who have been with us for a long time like [Greg Wuller] in Brisbane, Australia who celebrated his 49th anniversary with DNOW on Saturday.

We have entered an uncertain market on the heels of a challenging 12 months and I want to thank the entire DNOW team for your hard work and commitment. You are truly our greatest asset.

Today we reported fourth-quarter 2014 revenues of just over $1 billion and EBITDA of $31 million or 3.1% of sales. While average global rig count in the quarter was relatively flat when compared to Q3 2014, in the US we begin to be impacted by trends where some of our customers chose not to complete wells after they were drilled.

Due to the high intensity and the number of frac stages involved with completing wells in the major shale plays, completions now represent well over half of total well costs. This is a major shift from when the majority of the cost of a well was attributable to the actual drilling activity.

As a result, one of the most impactful ways for customers to reduce their CapEx expenditures is to not complete wells after they are drilled. A considerable source of revenue for our US business is through providing the products required to construct batteries where oil and gas is gathered from surrounding completed wells.

In situations where wells aren't being completed customers delay construction of these batteries and we have therefore experienced a reduction in these projects which we often refer to as hookups. These conditions coupled with the almost 5% reduction in billing days versus the third quarter were the main drivers behind the revenue reduction in a quarter that didn't experience any significant movement in rig count.

Looking across our energy branches in the US, an intentional continued reduction of large lower margin line pipe project orders to transmission customers, and reduced revenue to land rig construction projects, was partially offset by increased sales of line pipe, actuated and control valves and gas meter runs to gas gathering facilities.

All US energy branch areas experienced a normal seasonal decline except for our Rockies area which saw a much larger than normal decline driven by customers reeling in spending ahead of the rest of the US.

Consistent with cost-cutting efforts by our customers, they began quoting smaller projects that would normally have just been awarded to the branches and priced based on contracts resulting in pricing pressure. However, this gross margin erosion in the US branches was more than offset through increases in other segments of our business.

Our supply-chain business in the US, which includes customers in upstream, downstream and industrial markets, produced revenue consistent with the reduction in billing days. During the quarter our downstream and industrial activity wasn't negatively affected by commodity prices and our upstream customers in the supply-chain business maintained consistent activity.

Despite a strengthening US dollar, Canadian revenue improved slightly from one third -- from the third quarter due to the normal seasonal uptick, although it was less than expected due to market conditions. Some of this growth in Canada was market share gains with new customers and consisted of actuated valves destined for the oil sands, Artificial Lift in Alberta, and pipe valve and fitting sales in southern Saskatchewan.

Internationally revenues were basically flat with the prior quarter as the projects resumed from a softer third quarter but were offset as the strengthening US dollar limited gains in the segment.

In Australia, the largest revenue declines work with fluid transfer pumps in the mining industry, artificial lift products in the coal seam gas fields in Queensland and overall drilling activity. Other notable activity reductions were in the North Sea, Colombia and Mexico as well as continued turbulence in Russia.

Large project sales and the quarter included coated line pipe to Kuwait and line pipe and valve sold to several large integrated oil companies in Iraq and Angola.

Looking at the market activity going forward, we have clearly entered a challenging period that will continue to worsen for quarters to come and for which opinions vary greatly as to the extent and timing of the decline.

The US rig count freefall continues. While there is more downside expected, we've seen our worst 11-week rig count decline in over 27 years. We are at 1,310 US rigs, down 620 or 32% from the October 2014 high, meaning we lost 20% more rigs in the same timeframe compared to 2009 which is one of the most severe downturns on record.

The steeper the decline the harder it is to time expense management with revenue decline. At NOV the distribution group was the leading indicator of market trends as our revenue is very closely correlated to activity shifts unlike the equipment and services groups. Consistent with this, our group was also the first business to benefit from an industry recovery.

Irrespective of this, we have recently gained some new customers as well as grown share with some existing customers. During the height of activity in the shale plays over the past many quarters, some customers were more focused on getting wells online to produce oil and gas and weren't as disciplined about managing their supply chains. The result of this was sourcing leakage from their field operations to many of our smaller competitors in certain markets.

In an effort to rein in costs, most customers are being more intentional about putting controls in place to make sure their operations are sourcing products from their preferred suppliers. Also, in exchange for our commitment to help certain customers reduce operating costs, we have tied that effort to receiving an increased share of their purchases.

Recently a large operator that isn't currently a significant customer for DNOW visited one of our supply-chain services sites at another operator's shale location. Basically one of our customers is promoting the value of our services to one of their competitors.

At these sites we manage customers' complete supply-chain which includes: DNOW owned inventory to support the drilling and completion programs; the customer's original equipment spare part inventory; peer supplier consignment as well as logistics. Based on this operator's visit they have now asked us to implement that same solution in one of the most active shale plays which could happen later this year.

Additionally, we have seen and will continue to see some competitors close their doors in the face of this downturn and many of their customers have already shifted their purchases to our branches.

Despite these positive events analysts are currently forecasting an 800 to 1,000 rig count decline in the US that they believe will bottom sometime between Q2 2015 and Q1 2016. Customers are announcing CapEx budget reductions that range from low-single-digits to as high as 80%.

In Canada, where the cost to produce and transfer oil and gas is the highest, we may see the greatest impact from contractions in the energy industry. Conversely, our international segment will likely be the least impacted as a result of lower oil and gas prices since long-term projects and activity with national oil companies won't decline as sharply as it will in North America.

The one thing we know for sure is that no one really knows how far the market will deteriorate, when it will bottom, how strong the recovery will be or when that will happen. Based on current rig count declines, well depletion rates and decades of history in this industry activity is expected to recover and the question is really when and not if.

For all of the companies that combined to form DistributionNOW over the last decade, our revenues have dropped to as low as $1 million a rig per year in a weak environment and grown to as high as $1.3 million in a strong market.

On a quarterly basis this value differs slightly due to break up in Canada, normal seasonal declines in Q4 and large one-time projects. We plan to post a chart showing these trends in our investor presentation to aid folks in predicting our top-line performance based on their rig count assumptions.

Moving beyond the top-line, the three areas we are focusing on is managing expenses, pulling out trapped cash from the balance sheet and investing to grow the Company. We'll continue to make improvements in our gross margin percent due in part to our incentive plan changing behaviors.

We've also been successful in negotiating improvements with several low profit contracts, have chosen to walk away from some dilutive margin projects, and in a few cases have canceled customer contracts we inherited where we had exhausted all efforts to negotiate more reasonable terms that would improve profitability.

The benefits from gross margin percentage gains were predominantly offset by volume reductions, but also by overlapping costs from transitioning our outsourced tax department about creating our own in-house tax team, contract labor, increased severance cost, stock-based compensation associated with the creation of a Board and new management positions for functions required to be stable in public company, bad debt write-offs and expenses related to our ramped up M&A efforts.

Late in Q4 expenses and headcount related to projects associated with spend and ERP implementation peaked. Since then we have reduced headcount by over 350 to date. Of that amount 300 have happened since the end of 2014, one-third of which were in Houston, and we still have projects that have end dates in Q1 2015 and Q2 2015 that will result in further expense reductions as they are completed.

These actions, coupled with the fact that our incentive plan is self adjusting in a down market, should produce reduced expenses after we incur severance-related costs.

In 2014, as originally planned as part of our integration with Wilson and CE Franklin, we consolidated or closed 24 branch locations in the US and Canada. Based on market conditions we are actively evaluating opportunities to reduce expenses and consolidate more branches in geographies where we previously could not due to the high level of activity and limited roofline availability.

Moving to the balance sheet, although inventory went up we began to cut back on purchases in the quarter and expect our inventory to peak in Q1 and begin to fall throughout the year to align with market conditions. This will be achieved through actions we have already taken including, reducing our purchase order levels, down 37% since October; resetting reorder points throughout the network; dynamically redeploying material between our branches instead of buying new material by utilizing one of our new ERP tools; returning goods to suppliers and canceling purchase orders where possible.

We haven't seen any significant movement in product cost as suppliers' current priorities are rightsizing their organizations to match their new volumes. Regarding line pipe, we do not have the same degree of risk we had in 2009 as line pipe prices bottomed then and are already down to that level currently.

While commodity prices are falling, which can lead to lower prices, there is the counter effect of pipe mills shutting down capacity and the current dumping suit that looms over Korea and Turkey. Since we have very little exposure to OCTG, which will see the most downward costing adjustments in the market, we aren't anticipating any major downward swings in pricing.

With respect to accounts receivable, even though we were able to make some nice reductions in the absolute value, the days of sales outstanding, or DSOs, remained flat compared to the prior quarter due to the revenue decline. We still have a lot of focus and effort in this area with a goal of reducing DSOs by 15 days or more and are currently seeing signs of progress.

Over the past several quarters our capital expenditures related to integration, spend and the ERP implementation have been abnormally high in the $40 million to $50 million per year range for the last two years. As we have previously communicated, we fully expect the value of maintenance CapEx to drop down and range from $10 million to $20 million in 2015 now that we have wrapped up the majority of those projects.

Ultimately we believe our goal of managing working capital as a percent of revenue to 25% or less is achievable and, coupled with the normal balance sheet effects of being in a distribution business in a market decline, we should produce considerable additional cash.

Regarding capital allocation, we have been in somewhat a unique position of having a goal to actually create some leverage in our balance sheet through M&A. In the quarter we still had almost $200 million in cash and did not draw on our line of credit even after completing three small acquisitions by year end.

These new challenging market conditions have started to have a positive effect on these efforts. Not only are we continuing to aggressively pursue opportunities, we are receiving calls from past targets that have declined our offers. Based on current due diligence, as well as other discussions that are underway, we believe our ability to use cash and leverage to grow DNOW in our target markets and product lines looks very promising.

Okay, Dan, I will turn it over to you to review the financials.

Thanks, Robert. These continue to be interesting times here at DistributionNOW and the fourth quarter wrapped up an event filled year which included integrating three large distribution businesses in North America, converting our Company to one worldwide ERP system, and spinning off from NOV, creating an independent publicly traded company.

And now we find ourselves in an uncertain market. But this is nothing new and our seasoned management team has proven resilient in similar past cycles. We will continue to focus on the needs of our customers yet being mindful of our stakeholders.

Before I jump into our financials I would like to join Robert in thinking our dedicated employees who continue to be a true asset to DistributionNOW.

Robert discussed our business and I will touch on our financials. NOW Inc. generated earnings of $16 million or $0.14 per fully diluted share in its fourth quarter ended December 31, 2014 on $1.0 billion in revenue. This compares with net income of $32 million or $0.30 per fully diluted share on $1.07 billion in revenue in the third quarter of 2014 and compares with net income of $34 million or $0.32 per fully diluted share on revenue of $1.04 billion in the fourth quarter of 2013.

It should be noted that an earnings comparison with the prior year is not meaningful as 2013 did not reflect the full cost of running an independent publicly traded company.

Gross margin was 20.4% in the fourth quarter of 2014 compared with 19.9% in the third quarter of 2014 and with 18.9% in the year ago quarter. For the full year 2014 gross margin was 20.0% compared with 18.6% for 2013.

EBITDA for the fourth quarter of 2014 was $31 million or 3.1% of sales, this compares with 5.0% in Q3 of 2014 and 5.1% in the comparable quarter last year.

Revenue for the full year 2014 were $4.1 billion generating $116 million net income or $1.06 per fully diluted share. This compares with revenue in 2013 of $4.3 billion which produced $147 million in net income or $1.37 per fully diluted share. Once again earnings comparisons with 2013 are not representative.

Looking at operating results for our three geographic segments, revenue in the United States was $679 million in the quarter ending December 31, 2014, down 9% sequentially and essentially the same as the year ago quarter. The sequential revenue decrease resulted from normal seasonal decline coupled with negative customer sentiment as oil prices dropped sharply in Q4.

Operating profit in the US for the fourth quarter 2014 was $3 million compared with $25 million for the year ago quarter reflecting the higher incremental cost of operating as an independent publicly traded company and wind down costs resulting from improving peripheral software and business systems in the wake of multiple system conversions in the period.

For the year 2014 US revenue totaled $2.8 billion, down 2% from 2013 as we intentionally declined low margin pipe sales and had other product lines impacted by the disruption of the ERP conversion and the spin-off. US revenue represents slightly more than two-thirds of our total sales.

In Canada fourth-quarter revenue rose 4% sequentially to $180 million driven by a seasonal upturn in the market as well as the benefit of the ERP consolidation. Revenue was down 8% from Q4 2013 and Canada revenue of CAD669 million for 2014 was down 14% versus 2013. The 8% decline in the Canadian dollar relative to the US dollar adversely impacted revenue in 2014.

Canadian revenue was 16% of our total revenue in 2014, down from 18% in 2013. Canadian operating profit for the three months ending December 31, 2014 was 7.8% compared with 6.2% for the year ago quarter, showing consolidation benefits and our incentive plan impact on behaviors.

International revenue was $147 million in the fourth quarter, down 1% from the third quarter as strong Middle East sales were offset by reduced export and valve project orders as drilling contractors eased spending in Q4. Compared with the fourth quarter of 2013, international revenue was down 13%.

International revenue was $643 million for 2014, down 2% from the previous year. International revenue was 16% of the total revenue in 2014, up 1% over 2013. International operating profit for the fourth quarter 2014 was 6.1% compared with 7.7% in Q4 of 2013 reflecting fewer project sales. We continue to be optimistic about our international opportunities.

Revenue channels for the fourth quarter shows 81% through our energy branches, or stores, as many of us know them, which includes our pipe group as well, and 19% through our supply chain locations which reflects the resiliency of the supply chain group.

Looking at our income statement, operating and warehousing costs were $110 million for the three month ended December 31, 2014, this compares with $108 million in Q3 2014 and with $104 million for the similar period in 2013. The increase over prior year is mainly attributable to an increase in incremental costs associated with the ERP conversion and implementation. These costs include branch and distribution center expenses.

SG&A expense was $69 million for Q4 of 2014 compared with $55 million in Q3 2014 and $43 million for the year ago quarter. The increase was related to the net incremental cost in connection with operating as an independent company, spin activities and ERP conversion and implementation. These costs include increased cost for outside services and contract labor plus higher bad debt expense and related non-income tax expense.

The effective tax rate for the fourth quarter of 2014 was 32.4%. We expect the effective tax rate 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 December 31, 2014, which included accounts receivable of $851 million, inventory of $949 million and cash totaling $195 million. Cash increased $29 million during the quarter even after spending some $36 million on three small acquisitions. Approximately two-thirds of our cash is located outside the US with some 40% outside of North America.

Free cash flow for 2014 was $98 million. Capital expenditures during Q4 were $7 million bringing our 2014 spending to $39 million, the majority being spin and integration related. Looking ahead, we should return to our maintenance CapEx rate of some $10 million to $20 million annually.

Our current days sales outstanding are in the mid-70s and we continue to work on improving these results to closer to the 60-day range. Inventory urns were 3.4 times but believe we'll return to at least 4 turns. Days payable outstanding are now running in the mid-50s so our cash conversion cycle is 130 days.

Working capital is 35% of sales, 30% when cash is excluded, with our objective of getting to a 25% rate or lower. The single ERP system will be an effective tool to accomplish these improvements, thus freeing up additional cash.

At year and we were debt-free having not tapped into our unsecured $750 million revolving credit facility. When you consider our cash position and the $[215] million accordion provision of our five-year credit facility, we have in excess of $1 billion as we consider growth opportunities for DNOW.

During the first quarter of 2015 we will wind down cleanup items relating to the implementation of peripheral systems tied into our new ERP system while focusing on integrating our recent acquisitions into the DNOW family and managing through this downturn as we continue to focus on our customers.

Looking to 2015 and beyond, we have confidence in our strategy, in our employees and in our future as we position NOW Inc. to continue to serve the energy and industrial markets with quality products and solutions. We are an organization with an experienced management team, a strong balance sheet and we believe this current downturn creates new opportunities for us and our shareholders.

With that, John, let's open it up to questions.

(Operator Instructions). Matt Duncan, Stephens Inc.

I wanted to see if we could maybe dig into the cost in the quarter a little bit. The SG&A number obviously jumped a lot sequentially. Is there any way you can help us break out how much of that was due to one-time stuff? I think you mentioned the ERP install and bad debt expense both that were probably in that line.

Well, the pieces that we referred to, bad debt was probably $3 million of the increase and we had $2.5 million of outside service cost. I've mentioned a couple times how the one group I have had to go outside for is tax. And we kind of have some duplication because we have outside consultants that are doing our tax work as I am hiring a tax staff and have made great progress.

We have over half of the staff in place now, but that was $2.5 million or $3 million of extra cost. Temporary contract labor was almost $2 million. Stock option expense was over $1 million. Just -- our salaries -- a couple million dollars of salary expense just kind of goes on during the quarter, but that would probably be $10 million to $12 million of the 2014 increase, Matt.

Yes, and, Matt, there was also an increase of M&A expenses in the quarter of $1 million and I expect that to be even higher going forward.

Sure, yes, that makes sense.

And severance costs as well, Matt.

How much severance was in there, Dave?

It was in about $1 million range.

Okay. And it sounds like it is going to be a lot bigger than that in the first quarter since most of the layoffs have come there.

Yes, it will likely be a little higher. So these costs were higher than we anticipated. We simply must the timing on when the projects and when these things were -- we have been working on and have been talking about for some time would wrap up. But we are working on every element of cost in the business and we are bringing those down as we talk.

Okay. So, Robert, I appreciate that it may be difficult to look into the crystal ball and know this answer, but is there any way to help size the impact from the drop in oil on your business?

And I think historically you have said that you guys can outdo rig count by 3 to 5 percentage points, but my assumption has always been that is kind of in a normal environment and obviously we are anything but right now. So can you give us a little help in how to think about the relation of your business to a rig count number in the downturn?

Yes, like I mentioned on the call, Matt, it has ranged from $1 million per average operating rig per year to $1.3 million. We have actually produced a chart that we are going to post hopefully later today if not shortly after the call on our investor presentation that will show you quarterly for almost 10 years how that looks.

So you could actually look at the movements in rig count over that timeframe and make your own assumptions as to what the revenue per rig will be per quarter and then apply it to your recount forecast.

Okay. And that is a per quarter number, the $1 million per quarter or is that $1 million annually because the --.

No.

That $1 million to $1.3 million is annual; the data we are going to produce is quarterly.

Okay. Okay and is that a worldwide rig count number then? Because rig count has been less than 2,000 rigs obviously, and your revenue is well more than $2 billion if you are looking at it in terms of $1 million per rig. I just want to make sure we understand what rig count number you are using.

Yes, that is a worldwide rig count, Matt. And so, that will be going out today. We tend to see a higher revenue per rig when the market is growing; we tend to see a lower revenue per rig per year when the market is contracting. So, the chart will illuminate those points pretty well.

And then last thing for me just on the margins, what were the margins like in both the legacy NOV distribution business and the Wilson business back in 2009? And how should we think about the sort of where margins can go this time? Given that you've got some extra costs obviously with having spun out and being a freestanding company, how do we think about margins?

Well, that is the $64 million question, Matt. I mean it is really a volume question. And we don't know how the quarter or the year unfolds. There are many variables affecting the volumes depending on pricing and the timing and slope of the contraction, what our competitors do. Our challenge is to adjust costs faster than the production in revenues.

And where did those margins bottom last time, Dave?

In 2009 the Wilson organization lost money.

Okay.

And we were under 4% I think -- 3.8%, 3.9%.

We bought them at 3.9% without the extra $45 million to $55 million of expense we have right now for corporate and Wilson lost money.

Right, okay. And obviously you guys have been doing a lot of consolidation there so they in theory would lose money in the same downturn today, I assume.

When we -- back before we encountered this downturn we were having conversations about EBITDA margins, our story all along and conversations all along have been all the work that it is going to change culture and get profitability up in the acquired firms would happen in late -- in Q4 of this year or Q1 of next year.

So we haven't got that organization, just like we've said all along, to where it needs to be with respect to profitability. So it is impossible to say really if they would lose money in Q1 or Q2 because we have now integrated these businesses to the point you can't measure that.

Yes, you can't really tell anymore, okay. All right, that is helpful, guys. I will hop back in the queue, thanks.

David Manthey, Robert W. Baird.

So with your goal to reduce SG&A by $10 million from the peak in looking at the fourth quarter, assuming some of the items that you mentioned -- bad debt expense, M&A, severance, those sorts of things -- are somewhat one timers. Could you -- if we are looking at the $10 million reduction in SG&A what sort of normalized level should we use for the peak?

Well, SG&A should have peaked in the fourth quarter. And we should be back to the third-quarter level by yearend for sure -- well, I mean that is our target. That's our target. And then depending on what happens in the market you could see reductions beyond that. But by the second quarter, we are targeting an SG&A level kind of between where we ended the third and fourth quarters with wanting to get back down to the $14 million reduction by the fourth quarter, down to the $55 million range.

And of course, we are not stopping there. We are watching our customers and the market and we are adjusting costs carefully. We want to position ourselves for a recovery. That is really the end game, is something our managers -- our senior managers have been in this company for a long time, and really we want to poise ourselves for a strong future when the market comes back.

Okay and I am a bit surprised you are looking at flat pricing in this type of environment. But should we assume that in a flat pricing environment, you would continue to make gross margin gains? And if it turns out to be less than that, gross margin could actually go in reverse from where you are today?

Oh yes. I don't expect this to be a flat pricing environment. Our customers are hungry for some price concessions, and we are navigating that very carefully. But there will be some downward pricing pressures. We don't expect them to be anything like they were in the 2008-2009 downturn. One of our biggest commodities, of course, is pipe. And the price of steel was cut in half in that market, in that cycle, and the price today is where it ended in 2009.

So we think we are in pretty good shape from that perspective. But we do expect some margin erosion, but nothing like the last downturn.

But we've had good progress on the gross margin line --.

For sure, yes.

So we should keep that in mind, that there has been some good things happen. And as Dave said, it may slide a little bit, but we like kind of where we are heading with gross margin.

Okay, and then the final question on these three small deals. I assume those were among the four LOIs that you had with the $100 million in aggregate revenues. Could you talk about if those are energy or industrial-focused acquisitions?

Yes, Dave, they were part of that. They were $100 million of revenue. The particular -- the fourth one that didn't get closed in the quarter represents the vast majority of that $100 million of revenue.

So these three were small. One of them was a safety and PPE, personal protective equipment distributor in the Eastern Hemisphere. One was a facility that filled a geographical hole that we had for valve and valve actuation in the US. And one was the same thing; it was a geographic kind of weakness for us in the downstream industrial and midstream market.

Okay, thank you very much.

Flavio Campos, Credit Suisse.

I just wanted to talk a little bit about inventory risk here on the gross profit line as well. Just think about how much inventory you are keeping right now and how you plan on going through that as we navigate tough waters going forward and especially on the pressure from quantity prices as well. And just talk a little bit about how inventories look right now, especially in relation to 2009.

Well like I had said earlier and it is a different environment, in 2008 at the peak of one of the best markets in the last 30 years we had a lot more inventory and it was -- we were charging premium prices at the top of that market. And so we saw a lot of overpriced inventory, over costed inventory and that scenario had large write-downs. But things are different today.

We have less inventory, we think the replacement cost for the goods we have in inventory are much closer to where -- they're where they need to be and we don't expect the kind of devaluation we saw in 2009. So as far as devaluation of our inventory, I think we are in comparatively much better shape than 2008-2009.

From a term rate perspective we have a professional procurement and logistics team who know how to curtail purchases, redeploy inventory and return goods to suppliers to maximize the speed at which we pull inventory out of the system. So like Dan had mentioned earlier, our goal is to get to a turn rate of north of four, that should happen sometime this year.

And it should be even easier this time than it was last because we have got a lot more branches from which to leverage to reduce inventory that is in existence across the network and our all-in-one ERP system.

So you can put settings in the system that automatically if a branch in Williston needs to reorder valves it will automatically look over to Casper or look over to West Virginia or look into Texas and find surplus and then stop that purchase order and just do a stock transfer order from that branch to reduce the net value of inventory in the system.

Yes, we have a much larger network from which to source goods internally and service our customers.

Perfect, perfect. No, that is very helpful. And just going forward a little bit, just looking forward a little bit. I know again crystal ball is very difficult. But that very long-term 8% margin that you guys were talking about, I am just trying to see like beyond this dislocation that we are going to have over the past -- next two years and the margin pressures we are going to have in 2015. But just seeing like how confident you are on just getting to that magic number over there.

Yes, I have said all along, since we started these conversations back mid last year, that we believe we can get to 8% by integrating these businesses and leveraging the breadth of what we do. I still believe that, but I have said all along it would be at the revenue levels we were at at that time or greater. And so we have got to recover back to those volumes if we are going to get to that number.

Perfect. That is helpful. Thank you, I will jump back into queue.

Walter Liptak, Global Hunter.

So I wanted to ask about the -- you mentioned in your prepared remarks about some branch locations and how you were going to optimize some of those. I wonder, how should we be thinking about costs for the warehousing expense in 2015.

When we finished the 24 last year that basically concluded all of those that were on our original plan list. Now they are in a completely new scenario where some of these hottest plays are definitely going through a downturn and roofline is becoming available and our volumes are less and therefore our inventory requirements are less and our headcount is less. It opens up more opportunity for us to look at consolidating more facilities.

Right now we have -- we are looking around 40 locations that are in -- global, by the way, they are not just in the US -- about 40 locations that are in varying stages of review. They're already -- they're either already being consolidated as we speak or it is going to be as long as us looking for someone to do a build to suit because we can't find a proper facility to consolidate.

So I believe that if we were to consolidate all of those at one time you are looking at $10 million to $15 million of costs easy. But it is going to take a while to do those and some of those won't happen because we haven't gotten to the point of making those decisions yet because we have other due diligence we are doing with respect to those towns.

Okay, okay, good. And then you also mentioned some contracts that you walked away from. I'd just be interested in a little bit more color on that -- upstream, are they midstream? If you can quantify the dollar value of some of that and the kind of benefit you might get.

Yes, they were mainly up -- no, they were actually midstream and upstream. And some were not that significant in revenue and some were in our top 20 customer list. So definitely these are accounts where, before corporate expenses, were producing low-single-digit EBITDA. So by the time you add in the corporate support for these large clients I'm sure they were below water.

And for the vast majority of those we were able to negotiate some solutions to the contracts that allowed it to be a favorable account for us and we continue to service and add value to that customer.

I'm not going to quantify the amount of revenue that would go and actually hasn't left yet on either account. I'm not sure of the timing of when it is actually going to get transitioned, because we have clauses in these contracts that gives the customer a certain period of time before we can actually leave the operation. But some of them are in the tens of millions of dollars of revenue.

Okay. Okay, sounds good. Thank you.

Jeff Hammond, KeyBanc Capital Markets.

So just on US this quarter kind of barely profitable, but obviously a number of moving pieces and one-timers. So I guess as you continue to see rig count drop and then you balance it out with kind of your variable costs and some of these one timers, I mean in the first half of 2015 do you think -- do we see a period where the US goes negative in terms of profitability?

Well, again, that is really a volume question. The severity or the limited nature and the duration of the downturn will drive that possibility. All we can do is grow the top line by trying to take market share in this environment. We have seen nice success in the growth of our gross margin, so we are preserving the top line, we're doing everything we can to manage cost and generate cash on the balance sheet.

Our opportunities in this market are to be very acquisitive and generate cash. But in terms of the bottom line, that is a matter of volume and how fast we can remove cost from the business.

Yes, I have been in this business since -- and this particular group at National Oil Distribution since 1991 and I have seen some of my predecessors -- to try to manage earnings any given quarter and not for the long-term -- I have seen them devastate our operations.

I mean, I've seen them cut over half of our branches in some of these core areas and that cost us a lot more than losing money in a quarter or two. Because we had to go back and make huge acquisitions to regain that share. So we will manage our expenses down as stringently as we can in all areas, but the last thing we are going to do is sacrifice our future.

And unfortunately for the US this is the way we do it -- two-thirds of our revenue is in the US, but 100% of all of these corporate costs hit the US. So we need to keep that in mind.

That is a good point. All the corporate costs to support the world are in the US group.

Right, okay. Very helpful. And then just on M&A I think you mentioned some folks calling you back up that you had been talking to before. But just talk to me about how this significant downturn is impacting people's willingness to kind of move forward with deals. Or are most of the deals you are going to get done kind of more stress situations?

Well, there is a handful of companies that we have gone after since Q2 that kind of giggled at us when we offered up our standard kind of multiple on what we had offered to acquire their companies that are calling back now going does that offer still stand.

So obviously our answer is not that it still stands because we are in a different environment. So we go through due diligence and come up -- see if we can find some middle ground that they're willing to accept so that we can close these deals.

We haven't gotten to the point of that occurring yet -- I mean, the calls have happened and we are doing due diligence, but we haven't come to the point of coming to terms. But definitely the phone is ringing for people that kind of giggled at us in the past.

On top of that, some of these other deals that we're working on right now that are scattered all over the world are of pretty good-size. They are not nearly as big as Wilson or CE Franklin, but they are medium-size opportunities and they look very promising.

Okay, and just -- I know you haven't talked in the past about share buyback, but obviously you have got a lot of cash, you have great capacity. If you go through a period where you don't get deals done and your stocks come down here how do you think about share repurchase?

Well, I would definitely tell you that is not on our priority list from a perspective of how to use our cash. I mean we believe that we are not going to have any issue. In fact we think we will be successful getting debt on our balance sheet through acquisitions.

If at some point in the future well down the road we are successful at that like NOV was, and we pretty much made it more difficult for us to buy more companies based on our previous success, we would probably have a conversation about doing the same thing that Pete did at NOV with a dividend first. But --.

Right.

But I don't see dividend or share buybacks anywhere in our near future.

Thanks, guys.

Josh Wilson, Raymond James.

I wanted to make sure I understood you correctly on the 8% EBITDA margin goal. Are you saying you need to get back to something like a $4.3 billion type of annual sales to reach that goal?

Yes. I have said in every meeting, every time I have had this conversation for every month we have been public, that that was all dependent on same or greater revenue. You can't cut your revenue by $500 million or $700 million, whatever the number ends up being based on rig count, and lose that much margin dollars and cut expenses enough to get to 8% without completely annihilating your company.

And as we --.

Now, we could make the cuts necessary to get to 8% at a reduced revenue level if we knew it was going to be that way for 5 or 10 years in the future, but we are not going to sacrifice our future to get in a quarter or two.

That make sense. And can you talk about what sort of decremental EBITDA margin we should be looking for in 2015?

This is Dave Cherechinsky. Generally if revenues decline, especially in this downturn the way it is looking, you could expect detrimental flow throughs in the 15% range. That can vary based on pricing pressures in the market.

And severance.

So -- and --.

And whatever acquisitions may do to our --.

That's right.

Yes, that is outside of acquisitions.

Right.

Right. Okay, that is what I was looking for. And then with the various reductions in headcount that you have done so far and the other cost initiatives, how much have you taken out of operating and SG&A costs that we should subtract or add back before we start applying the decremental margin?

Well, right now it is in the $17 million to $20 million range. But we have given some guidance on SG&A in the forward quarters, that is factored in there.

And that was our last question. I will turn it back over to Robert Workman, President and Chief Executive Officer, for closing statements.

Thanks, everybody. I appreciate your interest in DNOW and we look forward to our next conference call.

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