DNOW Inc (DNOW) 2015 Q1 法說會逐字稿

Welcome to the first-quarter 2015 earnings conference call. My name is Paulette and I will be are operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you, Paulette, and welcome everyone to the NOW Inc. first-quarter 2015 earnings conference call. We appreciate you joining us this morning and thank you for your interest in NOW Inc.

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 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. financial results for the first quarter ended March 31, 2015, 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 US 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 our latest Forms 10-K and 10-Q that NOW Inc. has on file with the US 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, 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 also be noted that we plan to file our first-quarter 2015 Form 10-Q later today, 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 to the call over to Robert.

Thank you, Dan.

Welcome to DistributionNOW's Q1 2015 earnings call. Today we reported first-quarter 2015 revenues of $863 million, and EBITDA, excluding other costs for acquisition-related expenses and severance, of $4 million.

With over 80% of our global revenues tied to the provision of pipe valves and fittings to oil and gas operators, and for maintenance repair and operating goods to drilling contractors and service companies, the reduction in upstream activity had the expected affecting our Business. With sequential rate count declines of 28%, 24%, and 4% in the US, Canada, and international respectively, it is to the credit of our amazing employees' efforts that our revenues declined at a rate consistent with the global rig-count decline and an intensely competitive market, and when our customers were delaying completions of recently drilled wells and cannibalizing their existing inventories to minimize costs.

Looking at rig movements on a DNOW-weighted geographic basis, our markets effectively contracted 24% sequentially, yet our revenues were down just 19% on an excluding acquisitions basis. For that, I would like to thank our dedicated, hard-working employees for growing market share when customer spending per operating rate was on a decline, and for managing expenses to minimize the impact on EBITDA from falling revenue.

I'd like to take a moment to acknowledge Eddie Doucette in our Houma, Louisiana branch, who I have personally worked with on several projects over the last few decades, and who will be recognizing his 49th year at DNOW in just a few short months.

Annualized revenue for the quarter, excluding acquisitions, was $1.097 million per average global operating rig, only down slightly from the $1.102 million produced in the prior quarter. With acquisitions, annualized revenue for the quarter was $1.107 million per average global operating rig, sequentially up nearly 6%. Revenue in the quarter from acquisitions was $54 million, up $49 million from the prior quarter.

Decremental operating profit flow-throughs on reduced revenues were 24%. This includes $11 million of sales price erosion and $9 million of expenses related to acquisitions and severance. Excluding these items, decremental operating profit flow-throughs were 10%, well within the 15% pre-price effect decrementals we were expecting.

Digging deeper into the quarter, increased revenue with our downstream, industrial, and midstream customers helped to partially offset declines with our upstream customers, which are operators, service companies, and drilling contractors. Activity declines in the upstream sector were amplified by wells being drilled, but not completed, which are estimated to be greater than 4,000, as well as customers destocking their warehouses and drilling rigs being idled. While that trend negatively affected our upstream branches, the reverse will occur when this large segment of our business benefits as customers return to completing wells building tank batteries and resuming maintenance repair, refurbishment, and the restocking of drilling rigs as they go back to work.

In the US, nice market-share gains with our supply chain operator customers in the Eagle Ford and the Permian helped offset reduced volumes with our energy manufacturing customers, the impact of temporary facility closures due to weather, sharp activity declines in the Gulf of Mexico, certain operators shifting facility construction to turnkey fabricators, and a challenging line pipe market due to oversupply and some customers remaining in a wait-and-see holding pattern.

On a positive note, discussions and proof of value pilots are well underway with three new supply chain customers that should materialize in the coming quarters, and for whom we have little market share today. These three customers include an operator in one of the most active shale plays, a large refiner, and a manufacturer. I expect to be able to talk more specifically about these customers in the near future.

In Canada, where activity declines are most severe and in stark contrast to first quarter normally being the best quarter of the year, and in a period where rig-count declines in the first-quarter timeframe were the first I can recall outside of the 2009 financial crisis, revenues declined more sharply than rig count due to foreign exchange, and in large part, to drill the uncompleted wells and delayed or canceled fiberglass line pipe projects in southern Saskatchewan Bakken.

Internationally, revenues were buoyed by two March acquisitions, which offset declines from export volumes, due to delayed projects, idled or scrapped drilling rigs, and customers destocking to reduce their OpEx, reduced or canceled valve projects in the CIS and Middle East, a line pipe project in Kuwait from Q4 2014 that did not recur, rig count and well completion declines in Australia, and continued softness in Brazil and Colombia. Looking at market activity moving forward in the US, while the rate of rig count decline is less severe now than it was in prior months, for example the US lost 792 rigs in the first quarter and just 116 in April, many analysts are calling for the bottom to occur late in 2015 or early 2016.

Accordingly, and outside of acquisition revenue gains, the market will continue to apply downward pressures on our revenue stream. While we feel strongly that our downstream, industrial, and midstream customer activity will remain robust or even improve, revenue gains here simply won't be enough to offset declines in the more than approximately two-thirds of our US business tied to oil and gas operators, drilling contractors, and service companies.

In Canada, where rig counts are already down significantly more than any comparable period since at least before the year 2000, we have now entered the breakup period, where activity drops precipitously due to the ground thawing in several areas and making it virtually impossible to move equipment. The CAODC is forecasting 47% less wells drilled this year in Canada, which will have a direct impact on our revenue stream.

We have seen a 25% increase in project quotations, as customers take more orders out to bid in an effort to decrease costs. Additionally, for the large amount of goods our Canadian business purchases from the US, the effect of a strengthening dollar is putting pressure on margins. While we are experiencing significant declines with customers in the oil sands and southern Saskatchewan Bakken, the field is focused on gas drilling, such as the Duverney and the Montney, aren't experiencing the same level of declines.

We are confident in formalizing two recent awards; one is for pipe fittings and flanges for a large international oil company, and the second one is for valve actuation and controls for a large independent, both in Canada. They are also receiving considerable off-contact span, or what we call leakage, from three of the largest operators in Canada, where we don't currently hold the contracts.

Internationally, we expect revenue declines from continued activity reductions to be more than offset by a modest seasonal uptick in Russia and Kazakhstan; a few new multiplex pump package skids, as well as several pump rebuilds for three large operators in Australia; market-share gains in the Middle East and North Africa; and sequential quarter revenue increases from recent acquisition of approximately $30 million.

Moving beyond the top line, our priorities and managing expenses, pulling out cash trapped on the balance sheet, and investing to grow the Company have not changed since our last call. As you will see on our updated investor presentation, which we will post later today, our gross margin percent dropped 240 basis points, driven primarily by $11 million of price erosion and $5 million of inventory step-up amortization charges related to acquisitions. We believe that customer price concessions that we have made in this environment were largely reflected in the quarter, but how our competitors react and given the possible deflationary pressures on inventory cost due to market deterioration will influence results in the coming quarters.

On our last earnings call, we stated that we plan to reduce SG&A costs from $69 million in the fourth quarter of 2014 to $62 million by the second quarter of 2015. Excluding acquisitions in the quarter, actual SG&A dropped to $57 million, a $12 million sequential decline, and operating and warehousing costs were reduced by $10 million. Warehousing, selling, and administrative expenses, which comprises operating and warehouse costs and SG&A, and excludes acquisitions, reflects $22 million sequential efficiencies, but when including acquisitions, shows a net $50 million decline. We will continue bringing efficiencies to operations while stopping short of sacrificing our future. We will position the business to effectively manage through this and prepare to take advantage of a recovery when customers start restocking their operations, begin completing wells, and complete delayed projects related to facilities, or as we call, hookups.

Excluding acquisitions, were reduced headcount in the quarter by just under 500, with an additional force reduction of over 150 in April. To date, we have reduced headcount by over 700 from the peak at the end of Q3 2014, while simultaneously adding more than 450 new employees through six acquisitions over the last two quarters.

Additionally, we have instituted a limited furlough program in Canada and have been repatriating several expats we have working internationally. In 2015 so far, we have also closed or consolidated 15 locations.

Moving to the balance sheet, while days of inventory and days of sales outstanding grew, these balance sheet accounts combined dropped $146 million when excluding acquisitions. We believe we have just turned the corner in reducing these accounts and fully expect to reduce them an additional $300 million to $350 million in the current market environment and outside of acquisitions throughout the coming quarters.

As we allocate capital, we will maintain sufficient liquidity to support growth and recovery, as we know well that this business can consume as much cash in an upturn as it generates in a downturn. Though [prices] still has fallen dramatically during the first quarter, around 25%, driven by a surge of imports due to strong dollar and a requirements reduction from pipe mills. The steel mills are looking to drive up the price by more output reduction, new the dumping suits, and further cost reductions.

Steel mills believe prices are at or near the bottom, as a steel price increase was announced last week. Pipe prices have not fallen like steel, due to idling at several of the pipe mills. Welded pipe prices have fallen around 10%, but many of the mills still have high priced steel to work through.

The welded pipe trade case against the Korean and Turkish mills is expected to have a preliminary announcement in May, but will not finalize until the fourth quarter. Domestic seamless mills are idling capacity, so there's not much room for price to fall on reduced production. If steel processes stay low and the dollar stays strong, we would expect a further deterioration in pipe pricing, as well as other steel-related products in the second half of the year. Also in the quarter, we moved to a net-debt position of $13 million.

On the capital allocation front, we have completed seven acquisitions, three in Q4 2014, three in Q1 of this year, and a small one this week in Europe. The largest of these closed mid-March and is called John MacLean & Sons Electric. It has a long history, operating in four countries, with 11 locations and more than 200 new employees, and will help us expand our electrical distribution business. The brands and geographies that MacLean's represents fills strategic holes in our current business, the two largest of which are IEC cables and electrical operations in the UK and Australia.

The second largest of these acquisitions, Machine Tool Supply, which we close in early Q1, provides the same products and services to manufacturers as the DNOW supply chain group does, as well, to customers in the aerospace and industrial markets. MTS, which was founded in 1952, brings many years of operating experience, vendor relationships, and product leverage to DNOW. Leveraging the strengths, proven processes, and experienced staff from MTS, we will now be able to expedite the implementation of several customer sites DNOW has in its order book.

The remaining five acquisitions represent product line and/or geography targets for upstream and downstream energy businesses. They fill holes that we have for valves and actuation in the US Rockies, midstream and industrial pipe valves and fittings and artificial lift in the mid-continent, protective personal equipment in Europe, and marine and shipboard cables in the North Sea.

These acquisitions added $54 million of revenue in Q1 2015, and should add an additional $30 million quarterly with mid to high single digits EBITDA moving forward in this current market environment.

We currently have four mutually executed LOIs in the pipeline for companies in key product lines that we have described in our investor presentations and while on the road. While energy, mining, and utilities M&A has slowed down due to weather, [the oil prices] and analysts are pondering whether or not the price drop will encourage or discourage activity. Our M&A pipeline remains healthy as ever, to the point that we continue to increase our deal value threshold.

The deal team continues to let the cream rise to the top and is focusing on doing the right deals for our business. While multiples will likely exceed the 4 to 6 range we had originally targeted for some opportunities based on forward EBITDA projections in a declining market, they are well short of what we offered or would've allocated just a few short months ago.

We remain optimistic that we can put our cash and available credit to work to generate returns for our shareholders in a market that is conducive for consolidation. I want to thank our shareholders for their support and for your interest in DistributionNOW.

Having said that, I would like to turn the call over to Dan to review the financials.

Thank you, Robert.

We are nearing the completion of one year since spinning off from NOV, and while our financial results are not where we want them to be, we have accomplished much, including integrating three large distribution businesses in North America; converting our Company to essentially one worldwide ERP system; and creating an independent publicly traded Company, a Company which is a world-class provider of products and services to the energy industry.

We are facing headwinds from this uncertain market, but this is nothing new, although this downturn is more severe than most others and our seasoned management team has proven resilient in similar past downturns. We will continue to concentrate on the needs of our customers while focusing on producing results for our stakeholders.

Before I jump into our financials, I would like to join Robert in thanking our direct dedicated, hard-working employees who continued to be a true asset to DistributionNOW.

Robert discussed our business, and I'll touch on our financials. NOW Inc. reported a net loss of $10 million, or $0.09 per fully diluted share, for the first quarter of 2015 on $863 million in revenues. This compares with net income of $16 million, or $0.14 per fully diluted share, on $1 billion of revenue for the fourth quarter of 2014, and compares with net income of $41 million, or $0.38 per fully diluted share, on revenue of $1.07 billion for the first quarter of 2014. It should be noted that an earnings comparison with the year-ago quarter is not meaningful, as Q1 2014 did not reflect the full cost of running an independent publicly traded Company.

Our first-quarter results included $9 million of acquisition- and severance-related charges. So, when excluded, our net loss was $3 million, or $0.02 per fully diluted share. Gross margin was down $50 million from Q4 at 18.0% in the first quarter of 2015, compared with 20.4% in the fourth quarter of 2014, and 19.3% in the year-ago quarter. Half of this margin decline was attributable to reduced volume, with the balance due to price reductions, increased cost of products, and step-up amortizations for the acquisition assets.

Operating margins were down $34 million sequentially, as the previously mentioned $50 million gross margin decline was partially offset by operating expense reductions totaling $15 million, which was net of the acquisition-related additions. EBITDA for the first quarter of 2015 was a loss of $5 million, but with the acquisition and severance-related charges are excluded, EBITDA for Q1 was a positive $4 million.

Looking at operating results for our the three geographic segments, revenue in the United States was $601 million in the quarter ended March 31, 2015, down 11% sequentially and down 15% from the year-ago quarter. The first-quarter decrease was driven by the sharp decline in the US rig count, slightly offset by incremental revenue gains from acquisitions. Excluding acquisitions, sequential US revenues were down 14% compared with the US rig count decline of 28%.

Operating profit in the US for the first quarter of 2015 with a loss of $12 million, compared with a profit of $30 million for the year-ago quarter, reflecting revenue declines coupled with the higher incremental cost of operating as an independent publicly traded Company.

In Canada, first-quarter revenue decreased 36% sequentially to $116 million and down 39% from Q1 2014, reflecting the sharp declines in the Canadian rig count and reduced spending in most regions. Also, fiberglass purchases plummeted, as these high-dollar projects were the first to be cut. The nearly 9% decline of the Canadian dollar relative to US dollar adversely impacted revenue in Q1. Canadian operating profit for the three months ended March 31, 2015 was 2.6% compared with 8.4% for the year-ago quarter. The decrease in OP was essentially due to the revenue decline, partially offset by the benefits of cost-reduction measures in Canada.

International revenue was $146 million in the first quarter, down 1% sequentially and down 20% from the first quarter of last year. The revenue decline was primarily due to the non-repeating of large projects, offset by incremental gains from acquisitions in the period.

International operating profit for the first-quarter 2015 was 0.7%, compared with 6.1% in Q4 2014, as inventory step up, stamp duty in the UK, and other costs relative to acquisitions impacted first-quarter international results. We continue to be optimistic about our international opportunities. Revenue channels for the first quarter show 75% through our energy branches, or stores, as many of us know them, with declines across the board geographically and 25% through our supply chain locations, which reflects the continued improvement in the supply chain group, which also benefited by our acquisition activity.

Looking at our income statement, I wanted to mention a reporting change with the first-quarter statement. We are combining operating and warehousing costs with selling, general, and administrative expenses, and we will begin reporting as warehousing, selling, and administrative expenses. We believe this change provides a more meaningful measure of our operating measures, and including operating and warehousing costs within SG&A, is more useful to users of our financial information. Plus this will be more consistent with our peers.

Operating and warehousing costs were $103 million for the three months ended March 31, 2015. This is down $7 million from Q4 2014, and actually down $10 million when acquisition additions are considered. These costs include branch and distribution center expenses.

SG&A expense was $60 million in the recently completed quarter, compared with $69 million in Q4 2014, and with $44 million for the year-ago quarter. The increase over the year-ago quarter is related to the net incremental cost in connection with operating as an independent Company, spin activities, and ERP conversion and implementation. As well as SG&A that came with the six acquisitions we completed during the last two quarters.

When acquisition additions are considered, SG&A actually fell $12 million sequentially. The reductions from Q4 are primarily cost reductions, including contract labor, overtime, and outside services. The effective tax rate for the first quarter of 2015 was 19%, as the rate was impacted by nondeductible expenses in the US and foreign jurisdictions, and other discrete items. We expect the effective tax rate to be close to 30% for the full year.

Turning to the balance sheet, NOW Inc. had working capital of $1.38 billion at March 31, 2015. Q1 accounts receivable was $797 million, a reduction of $54 million, which is after adding $64 million from additions. So we showed strong collections progress in Q1, especially in Canada.

Inventory was $945 million, or $4 million lower than year end, which includes an additional $24 million from acquired companies. We have slowed the inventory replenishment process and should show significant reductions in the coming period.

Cash totaled $122 million at March 31, 2015, which was down $73 million during the quarter, as $183 million was spent for three acquisitions mentioned earlier by Robert. Approximately 80% of our cash was located outside the US, with some 55% outside of North America.

Capital expenditures during Q1 were $3 million. As we've mentioned before, our maintenance CapEx should approximate $10 million to $20 million annually. Our current day sales outstanding work are in the mid-80s, and we continue to work on improving these results to be closer to the 60-day range. Inventory turns were 3 times, and we believe we'll return to at least 4 turns.

Both of these key metrics were unfavorably impacted by adding ending balance accounts receivable and inventory for Q1 acquired companies, with just portions of the quarter being recognized in terms of revenues and cost of products.

Days payable outstanding are now running in the mid-50s. On a trailing 12-month basis, our working capital was 35% of sales, 32% when cash is excluded. With our objective 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.

We ended the first quarter with the $135 million of bank debt, having finally tapped into our unsecured $750-million revolving credit facility to finance some of our acquisition activity, but our net debt position was only $13 million. Our borrowing costs approximated 1.675%, and when you consider our cash position and the unused portion of our five-year credit facility, including the accordion provision, as well as additional cash coming from our balance sheet, we have plenty of dry powder as we consider growth opportunities for DNOW, certainly in excess of $1 billion.

The second-quarter 2015 will be challenging as we deal with this downturn, coupled with the seasonal breakup in Canada, as we continue to concentrate on our customers. 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, Paulette, let's open it up to questions please.

Thank you.

(Operator instructions)

David Manthey, Robert W Baird.

Good morning. Thank you.

Hey David.

Good morning. First off, by how long would you expect hookups and the tank battery installations to lead an uptick in rig count. With all these uncompleted wells, I would think you'd see activity there before we'd see an uptick in rigs.

Yes, that would be my assumption. They've already spent the money to drill the wells, because in this new environment of these shale plays, the frac process or the completions process, the cost of that is now larger than the actual cost to drill the well, which is the first time I recall that ever being the case. And so customers are continuing to drill wells and just, instead of storing their oil in Cushing or somewhere else, they're storing it underground.

So as oil prices pick up, I would expect completions will pick up before rig count picks up. When that will happen is hard to say, and it really depends on each shale play, because each shale play has a different cost basis.

I've been reading reports all week from different oil companies who've announced earnings. Some of them say $60 oil would spur it, some say $65, some say $70. So I don't think there's any real consensus on exactly at what price for energy you would see a recovery in the completions process.

Okay, thank you. Second, with your organic revenues in the US being down 14% versus a 28% US sequential rig count, could you discuss the factors that drove that out performance? Again, there might be a timing lag there, there's probably some share gain. I don't know if there's a mix issue, but could you just help us understand what that was like and is that something that can be sustained?

The answer to your question is yes. We had share gains with several of our large supply chain customers that we basically managed their entire supply chain, and they've acquired some other firms in areas where we weren't getting the business. So as we transition -- as they transition supply chain management to us in those fields, we're gaining share even though their rig count is coming down in those markets.

And outside of that, there is some mix, we had some shift to business growth in our downstream and in our industrial and our midstream area, which helped offset some of the upstream gains as well -- upstream declines.

Okay, perfect. Thank you a lot, Robert.

Thank you, Dave.

Sam Darkatsh, Raymond James.

Hey Sam.

Good morning, Sam.

This is Josh filling in for Sam. Thank you for taking my questions. Do think the customer destocking that you talked about is complete, or there still more of that to go?

Well, it's hard to say exactly when they will run out of inventory. Basically what is happening is for offshore drillers who buy a lot of consumables from us, whether it's safety goods or spare parts or expendables, for all of these big offshore rigs that they are idling, they're clearly removing the inventory and redispersing it to operating rigs.

And then on the land market, I know everybody has seen pictures of these different yards that have all these rigs stacked out in them. As they need goods to support the rigs that are still drilling, they're sending their employees into those yards to look for material, as opposed to purchasing it.

And then generally, our oil and gas customers, which are a huge piece of our revenue stream, they have their own warehouses where they buy goods from us and our competitors and stock their warehouses. They're doing just the same thing we're doing; they're cutting back on purchases and trying to eat away at inventory before they start buying again. And it shows up clearly in all these earnings announcements you've seen from the contractors and from the operators, because they're coming in ahead of analyst expectations, because largely driven by their OpEx. Because their OpExes are coming in much lower than what most folks were forecasting.

So when that will end, it's hard to say and say. Sam, I can't imagine that -- Josh, I can't imagine that it's going to go beyond this quarter. But it's almost as hard to forecast that as it is to forecast what the rig count's going to be.

And could you tell us what your year-on-year growth was in April?

No, we haven't reported the results for Q2 yet.

It sounds like the $9 million of items that you called out was dispersed some between cost of goods and SG&A. Could you quantify those so we can get an adjusted gross margin?

This is Dave, Josh. For that $9 million, about $5 million as the amortization of step-up costs for valuing inventory at fair value, $3 million were M&A costs, about $1 million in severance, and that's the balance. So $4 million in the warehousing, selling, and administrative cost and $5 million in gross margin.

Got it. Thank you very much.

Thank you, Sam -- Josh.

Jeff Hammond, KeyBanc Capital Markets

Hey, guys. This is James Pickeral filling in for Jeff. So regarding pricing erosion, can you just provide some color on what you're seeing there, maybe by region or product vertical or maybe upstream versus midstream? And are you getting any suppliers to cooperate in this price concessionary environment?

Yes, so most of that price erosion is from our upstream segment, and it's with customers where we have healthy gross margins and we're working with them to try to maintain our share with them. It's not -- we definitely told some customers, no, when they asked for price concessions, because they weren't customers that had margins that would allow for price concessions. So It's mainly with our oil and gas operators and our drilling contractor customers on a global basis that we're having that type of erosion.

What we did is we set up addendums to our contracts with those customers, where we've basically established at what point, whether it's the price of oil or rig count, that we would reinstate old pricing. So once the market recovers, you should see the gross margins recover with it.

Got it. And then at the beginning of your script, you mentioned revenue per rig metrics. I'm just wondering, can you go through those numbers again and just talk about how overall demand, how that metric is relative to your expectations going into it and what we can expect the rest of the year by region on that basis.

So we have -- we published a slide after the last call online that shows, I think, roughly 10 years of pro forma performance with Wilson T. Franklin and Heritage National Oilwell Distribution that shows our revenue per rig through the cycles, includes 2009 and the ramp-up of 2008 and everything else.

So generally, in a market decline, our revenue per average operating rigs declines, mainly because of the destocking and the drilling but not completing wells kind of scenario. We actually almost duplicated the revenue per operating rigs in Q1 that we produced in Q4 which did come as a surprise; I fully expected that to drop, and that was mainly due to the market share gains I mentioned earlier in the call.

So I would imagine that that number has got to come down outside of acquisitions, just generally because customers are spending less per well right now. But who knows, we could have another surprise in Q2 and our operations group could excel and produce another number similar to Q1 as far as revenue per rig. It grew actually, when you add in acquisitions. So if we're successful with any of the acquisitions we currently have in discussions, then that actually could actually go up. But we never plan our business run acquisitions.

Got it. And if I could just a slip one more here. $54 million in acquired revenue in the quarter, you said that you expect $30 million the remainder of the year each quarter. Does that include the acquisition that you closed last week?

It does not include it, but the acquisition last week was one of the smallest of the seven, so it really won't move the needle on revenue.

Got it. Thank you.

Thank you.

Walter Liptak, Global Hunter.

Hi Walter.

Hi, good morning. I wanted to ask about the cadence of some of the cost actions that you're taking. In this environment, it looks like with the price of oil moving up and completions, the discussion we had, that it could be short-lived. How you managing costs? Is it to a decremental margin, or is to a normalized revenue level?

Well, the way we manage cost in this business, it might be a little different than what you hear from others. We -- at our leadership team, we worry about our corporate overhead costs, and so we manage those as needed based on what is going on in our business.

The majority of our costs are in our branches and in our field operating expense, and we actually don't put out emails that say, you need to lay off people or anything of that nature; our incentive plan drives behavior. So every time I run a report at the end of the month, with respect to what we have taken out of the business and the field, I'm frankly, kind of surprised. I never expected that we'd be down over 700 in headcount since Q3 at this point, and it's not been because of some corporate edict or anything that we've done with respect to trying to marshall actions out in the field. It's simply because people are trying to manage their expenses as best they can in a downturn to maximize their opportunity to possibly earn some incentive, even though the market is falling. So the field really takes care of each branch entrepreneurly, and they manage expenses accordingly.

All right, that's interesting. So in the second quarter, do you have an idea of how much more cost is coming out? Or is that still going to come out from the branches?

It's still going to come up through the branches, and I believe our guidance from the last call, which I've reasserted on this call, of expecting 15% decrementals to SG&A is still valid. We beat it in the quarter; we only had 10% outside of these one-time acquisition costs and pricing deterioration. But I still feel like that's pretty valid.

Okay, great, and if I could ask just one more on working capital items. I think you're alluding to some inventories and other working capital, cash inflow in the second quarter. Can we get an idea of how much? And then in inventory, is there anything that's where you've got it at prices that are below market?

Well, this is Dave Cherechinsky. Regarding inventory, when you go from a relatively strong market to a fairly bleak market like we're in, there's going to be some over cost at inventory, and we make adjustments for that each month. That is just kind of the nature of the beast in a downturn.

And then there is competitive pressures again, for that inventory, as us and our competitors and manufacturers try to generate cash in a market like this. So there will be downward pressures on pipe, like we've talked about the call. There will be some cost adjustments on the inventory we have, but we've got a plan to significantly reduce inventory throughout the rest of the year.

Same with accounts receivable, where we make very nice progress in the quarter, especially in Canada. We were able to generate $118 million in additional cash, because we're focused -- this is really where we focus in the downturn. An upturn, we focus on growth and taking care of our customers, and maximize margins. In a downturn, it's about generating cash from reduced capital expenditures, which will be down significantly in the year for us, and in pulling AR and inventory off the balance sheet prudently.

And Walter, we manage inventory, we don't have a LIFO/FIFO process here. We manage inventory on a moving average cost basis. So every month, if there is any over-costing in our inventory, we're taking charges in the month; you're seeing them in our results. We don't have a one-time reevaluation of inventory event.

Okay. Do you have a number of what that charge was during the quarter?

The charge for inventory?

Yes. How much -- yes.

It was probably in the $3-million range.

Okay. Thank you very much.

Thank you, Walter.

Doug Becker, Bank of America.

Thank you. I think you have made a very strong case to outperform the US rig count again in the second quarter. That said, the US rig count is on pace to decline something around 35% on average. Is just trying to calibrate this a little bit better. Is something of a 15% to 20% decline in the US reasonable in that type of rig-count scenario?

Well, I think what you could do is come up with what you think the rig count is going, and then look at our revenue per rig performance in the quarter and assume that we're going to perform somewhere similar to that. So it really depends on what you really decide that you believe the rig count is going to do.

This is Dave. I would add that we saw 800 rigs go away in the first quarter, and we haven't experienced the full effect of that at the field level. So you'll have some carry-forward from a significant decline in rig activity.

As well as Canadian breakup.

That's right. Canadian breakup and then the rig counts declines we're experiencing in the second quarter.

Fair enough. And maybe this is a difficult one as well. But as we think about 2015, if we assume rig count in the US bottoms around the second quarter, flattens in the third quarter, maybe increases a little bit in the fourth quarter, from what we know now; negative full-year EPS, but EBITDA is still positive?

Again, that's a matter of what's going to happen with rig count and revenues. Some think that the market will bottom in the second quarter if 2009 is a good proxy for what's going to happen, this year that could happen. And we could see some recuperation in the third quarter and in the second half. So it's possible we'd been even on EBITDA for the year, but that's like I said last call, that's largely a function of our customer spending and market activity.

I appreciate that. Thank you.

Thank you, Doug.

Matt Duncan, Stephens.

Hey Matt.

Hey, guys. Want to focus on the M&A little bit. So Robert, make sure I understand correctly how we annualize all of these acquisitions you've done. It sounds like $54 million added sequentially 4Q to 1Q, another $30 million sequential uptick into 2Q, so it's like $85 million a quarter of acquired revenue. Is that the right number to annualize?

That's correct.

Alright, and then you've got -- you said mid to high single-digit EBITDA margin, so something $20 million, $25 million of EBITDA from that revenue that you have acquired.

Well, I didn't do the math, but if you assume that it's going to be 8% on $85 million a quarter, I guess you're right. Yes.

All right, that helps. And then in terms of just the size of the deals in the pipeline, it sounds like you had a couple pretty good size deals that you got closed here in the first quarter. Are there others of similar size in the pipeline you think you can get done this year?

As you know, just cause we have an LOI signed doesn't mean the deal will get done, but of the four LOIs that we have signed now that we're currently working through, the collectively represent a little over $300 million of revenue.

Okay. So another pretty good chunk, if you can get them all to the finish line then.

If we can get them to the finish line. We never plan around them; we just take them as we get them done.

Okay. And then in terms of how the revenue breaks up, Dave, I don't know if you have the numbers, the acquired revenue. How does it break up between both energy and supply chain, then also by geography?

It's probably $30 million supply chain -- it's probably 50-50, Matt.

Okay, and then by geography? I guess the one in the US looks like it's supply chain, and the international stuff looks like it's energy branches. Is that a good way to look at it?

Yes, by geography, a little bit more than 20 in the US, and a little more than 30 internationally.

Okay.

That was the increase sequentially, and you can use those same ratios to get your $84 million.

But Dave, the revenue in the US, that is supply chain revenue, right?

That is correct.

Okay, and then last thing, I just want to make sure we understand what is going on with gross margins a little better. So if I take out the $5 million of inventory step-up charge, you were at 18.5%. Obviously, you are being hurt a little bit in the short term by some of the price concessions. Should we assume that those price concessions are probably going to continue until we start to see rig count recover, so that your gross margin might stay around this level until that happens? Is that the right way to model the number?

I would say the $11 million of price erosion in the quarter that's directly related to price concessions is largely most of the price concessions we made; it's definitely the vast majority, and those that will continue forward until we hit some of those triggers that we have in these agreements with our customers around oil price and rig count that allows us to reinstate prior pricing.

Okay. All right. Very helpful. Thank you, guys.

Thank you, Matt.

And we have no further questions at this time. I will now turn the call over to Robert Workman for closing comments.

I'd like to thank everyone for their interest in DistributionNOW, and I look forward to talking to you at our next earnings release. Thank you.

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