DNOW Inc (DNOW) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter and full-year 2016 earnings conference call. My name is Sylvia 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. Mr. Molinaro, you may begin.

Thanks, Sylvia and welcome, everyone, to the NOW Inc. fourth-quarter and full-year 2016 earnings conference call. We appreciate you joining us this morning and thanks 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 of NOW Inc.'s financial results for the fourth quarter and full year ended December 31, 2016, 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 the latest Forms 10-K 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 Investor Relations website at IR.distributionnow.com or in our filings with the SEC.

In an effort to provide investors with additional information relative to our results as determined by GAAP, you will note that we disclose various non-GAAP financial measures in our quarterly press release, including EBITDA, excluding other costs; net loss, excluding other costs; and diluted loss per share, excluding other costs. Each excludes the impact of certain other costs and therefore has not been calculated in accordance with GAAP. A reconciliation of each is included in our press release.

As of this morning, the Investor Relations section of our website contains a supplemental presentation covering our Q4 results and key takeaways, which should assist you in understanding our fourth-quarter performance. A replay of today's call will be available on the site for the next 30 days. It also should be noted that we plan to file our 2016 Form 10-K 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 turn the call over to Robert.

Thanks, Dan. Q4 2016 marked the second consecutive quarter of revenue growth for DistributionNOW, the first time since our spin in 2014. However, the growth in each quarter was attributable to distinctly different drivers. Q3 2016 revenue gains resulted from a full quarter contribution of the Power Service acquisition whereas sequential growth in Q4 2016 was organic and driven primarily by improved rig counts in North America from the early Q3 2016 timeframe.

While our business is positively impacted by rig count improvements, drilling contractors who we love, but only represent a small percentage of our North America revenue, experienced the uptick first. The real impact to our top-line performance comes from the operators who represent more than 50% of our North America revenues as they complete construction of production facilities or tank batteries as they are commonly called.

After an operator finishes drilling a multi-well pad that could take around two months to complete, they then move on to the frac job where service companies represent an even smaller share of our North America revenues. Once the frac job is complete, which could take an additional 45 to 60 days depending on the number of wells on the pad, DNOW provides several trailers of loads of pipe, valves, fittings and other miscellaneous items that will be used, along with equipment provided by other companies, to fabricate the facilities required to process oil, water and gas.

Then completion of the tank battery can take an additional 45 to 60 days. So while we enjoy modest revenue growth with the drilling contractors and service companies during the first few phases of exploration and reservoir stimulation, the most impactful revenue opportunity for DistributionNOW occurs many months after the drilling rig arrives on location.

Like we always said, oil and gas prices and rig counts drive our business, but this occurs over time. Revenue per global operating rigs for Q4 2016 was comparable to the last seven quarters at $1.3 million with acquisitions and $1.2 million excluding acquisitions completed in the last year.

During our third-quarter call, we communicated that we might see an usual sequentially flattish Q4 in the US as rig count additions that occurred early in Q3 2016 would begin translating into completed tank battery construction. We expected this rig count increase to produce higher daily revenues that would be enough to offset the normal seasonal impact of fewer billing days and holidays in Q4. The number of billing days in a given month or quarter are meaningful for a distribution business. For example, our US revenues declined sequentially from the third to the fourth quarters in eight of the last 10 years as Q3 is generally our strongest quarter of the year.

As anticipated, daily billing growth related to early Q3 2016 rig count improvements did materialize, allowing the US top line to improve modestly, along with revenue growth in our international and Canadian businesses. This trend has us encouraged about Q1 2017 and beyond as the strong rig count improvements over the past six months begin translating into revenue growth from our operator customers as they move to the completion of tank batteries.

We have the best people in the business executing each day to capitalize on this market recovery and growing our participation with our customers. Early in this two-year downturn, we made a conscious choice to aggressively reduce corporate expenses, consolidate locations and reduce headcount where feasible. We also drew a line in the sand and chose to keep our eye on our future by not exiting core markets and trying to hold onto our most valuable resource, the highly skilled men and women of DistributionNOW that are the face of the Company delivering value to our customers every day.

One such employee is Gary Ruth, whose office is in our Williston, North Dakota branch. I first met Gary in the mid-1990s when I was traveling the Bakken in my cowboy hat, Wranglers and boots training our branches on the application of progressive cavity pumps for surface fluid transfer applications. We will be celebrating Gary's 44th year with DistributionNOW this March. Gary started out as a store trainee like many of us and he has progressed through the ranks mentoring our people and taking care of our customers. Words cannot express how much Gary adds to our business, so much so I often corner the director of our Rockies area inquiring as to what we are going to do when Gary finally decides to enjoy the fruits of his labor and ride off into the sunset.

I'd like to take a moment to thank my friend, Gary, along with all of our amazing employees for everything they have done to make DistributionNOW a success and for the remarkable customer following they have created for our Company.

Like Gary, I have experienced many downcycles during my 26-year career at DistributionNOW and prior like when I saw what my parents' oilfield service company endured in the Permian during the 1980s. This most recent downturn is unique in both its longevity and severity. It came at a time when we had just doubled the size of our Company through two large acquisitions, implemented a global ERP system and spun off to become a standalone public company.

It appears we may be emerging from the bottom of this cycle and are headed to better days for onshore oil and gas exploration. I'd like to take a moment to reflect on what we've accomplished in these trying times. Since the downturn began in late 2014, excluding acquisitions, we've removed over $280 million of expenses on a run rate basis, reduced headcount by 37% and consolidated or closed over 70 branches, a portion of which won't be required to support growth in the business and will allow premiums on flowthroughs in the early quarters of the recovery.

We have improved the efficiency of our balance sheet, generated over $640 million of cash from operations, completed 12 acquisitions and ended the year in a net cash position. Our energy centers, which have been the core of our business for over 150 years, have expanded their offering beyond pipe, valves, fittings, safety products, tools, lubricants and other commodities to include expanded solutions in the areas of artificial lift and electrical.

We have added technology and refined our processes in our US supply chain services business to reduce direct material expenditures, streamline direct supply chain costs, improved maintenance productivity, reduced inventory-related working capital, streamlined time to revenue and managed the risk of material availability affecting business continuity for our supply chain customers. These investments have materialized into recent contract wins with Hess and Marathon Oil where Marathon Oil was just awarded this month.

Both were small customers for DNOW before the awards and represent organic growth opportunities for US supply chain in the coming quarters. The value we deliver was so compelling to our original two anchor customers, Devon and OXY, that they are greatly responsible for opening the door for us with both Hess and Marathon Oil. When our customers become the best marketing arm for our business, it serves as a testament to the hard work, performance and results produced by our employees.

During this downturn, we have continued to invest in expanded solutions for our customers, including some acquisitions which culminated into the creation of the US process solutions team. In addition to establishing DNOW as one of the premier fluid transfer solutions providers in the energy industry, our team of engineers and draftsmen design, fabricate and deliver modular solutions for tank batteries. These modular solutions positively impact our operator customers, enabling them to speed revenue generation by reducing the time to complete a tank battery and get oil and gas into the pipeline, reducing the number of equipment suppliers normally required for the construction of facilities and also saving our customers time and expense related to well hookup decommissioning.

The traction we are gaining in exposing customers to the benefits of this solution in shale plays outside of our core Rocky Mountain region is evidenced by the twofold increase in modular solutions bookings we've experienced in the last few months and revenue bottoming in US process solutions in Q3 2016 earlier than we guided to on our last call.

Now we will move on to an overview of our fourth-quarter 2016 results. For the fourth quarter of 2016, we reported a net loss of $71 million or a net loss excluding other costs of $31 million, which is a sequential improvement of $5 million on revenue growth of $18 million. The GAAP net loss includes pretax charges of $2 million for severance and acquisition-related expenses and $39 million for an after-tax charge for evaluation allowance recorded against the Company's deferred tax assets.

Earnings per share for the quarter was a loss of $0.66 or a loss of $0.29 per share after adjusting for severance, acquisition costs and the change in the Company's deferred tax asset valuation allowance. Sequential organic revenue improvement of $18 million was driven by growth in all three of our geographic segments.

Consistent with previous quarters, pricing pressures experienced early in the downturn persists and competition remains fierce. Gross margin percentage remains consistent with full-year results.

We recently completed the implementation of a third-party pricing technology that was integrated with our ERP system. We are currently in the training phase of the project, but the tool is designed to assist our branches with bids for customers, which is a sizable portion of our revenue. While some of this will naturally be achieved in a more frenetic environment, we hope this tool will help our branches combat the competitive pressures that persist.

Along with the natural inclination to push pricing, driven by our branch-level incentive plan, we believe this technology will aid our employees in recovering margins as demand spikes and product leadtimes begin to stretch out.

Due to increased OCTG demand on pipe mills, line pipe leadtimes have extended from 30 to 60 days out to three to six months. Some valve leadtimes have increased from stock to six weeks to 8 to 22 weeks. Raw material cost increases for commodities such as hot-rolled coil, iron ore, coking coal and scrap have risen significantly and are translating into product cost inflation. For these reasons, we've begun placing forward orders for these types of products to ensure we can meet the needs of our customers.

As we mentioned on the last call, we expected a $3 million to $5 million decline in warehousing, selling and administrative expenses and achieved results on the top end of the range all while growing revenue sequentially. Sequential flowthrough to EBITDA on incremental revenue, excluding other costs, was an unusually high 50% in the quarter as we reduced costs despite growth in all segments.

Outside of unexpected charges, we generally expect flowthrough to EBITDA in the 10% to 15% range, but it could be as high as 20% depending on the slope of top-line improvements. With the expense improvements made in the quarter and anticipated improvement in demand and consequentially pricing, we believe breakeven EBITDA improved from $700 million to revenues of approximately $650 million outside of any unanticipated costs. We will continue our efforts to reduce breakeven revenues further by maximizing product margin and minimizing expenses where possible as we continue to take down costs in the areas that aren't experiencing growth.

Diving deeper into the quarter, revenues in the US with upstream operators, land drillers and service companies grew sequentially by double-digit percentages. Growth with these upstream customers was consistent with rig count increases experienced sequentially in Q3 2016, which drove the completion of tank batteries in Q4 2016. Revenue growth with upstream customers was offset by declines in engineering and construction projects, chemical plants, utilities and refineries resulting in a modest net increase in US revenue.

Additionally, labor and frac spread bottlenecks are causing rapid growth of drilled and uncompleted wells in the Permian that when resolved we believe will provide a boost to revenue later this year as completions progress and more facilities are constructed.

Within the US upstream market, the largest revenue gains were in the Permian and Mid-Continent areas offset by weather disruptions in the Bakken, the winding down of our portion of the DAPL Midstream and Dakota gasification projects and continued declines with offshore drillers in the Gulf of Mexico.

About half of the 50% sequential revenue surge in Canada with upstream operators and land drilling contractors was partially offset by declines with midstream customers and engineering and construction firms. Unlike our operations in Europe, Asia-Pacific and Latin America where revenue declines continue due to a depressed deepwater market, our operations in the Middle East, Russia and the former Soviet Union saw growth from oil and gas operators like the TCO future growth project helping the entire international segment to grow.

Looking at market activity moving forward in the US and Canada, we expect that rig count improvements from late Q3 and early Q4 2016 will continue to drive increased facility construction projects with our operator customers. Top-line growth could also be spurred by a small boost from the spring turnaround season downstream, continued implementation of our supply chain solutions with Hess and the beginning of our rollout with Marathon Oil.

In our US process solutions where some leadtimes can be lengthy, we would expect modest growth as the recent activity of orders translate into shipments in future quarters. Internationally, expected project shipments in most of our operating areas should allow this energy center segment to grow despite continued contraction from deepwater customers.

Moving to capital allocation. In the quarter, we were able to generate cash flow from operations of $49 million bringing the total to $235 million for the full year of 2016. Continued cash generation enabled us to move sequentially from a net debt position of $14 million to a net cash position of $41 million in the quarter. Sequentially, we generated cash by reducing net inventory and receivables by a combined $34 million, increasing inventory turns from 3.3 to 3.7 and maintaining DSOs relatively flat at 60. We also continue to have minimal capital expenditure needs of $1 million in the quarter.

These improvements to our balance sheet have reduced working capital as a percent of revenue, excluding cash, from 29% to 24% sequentially. Our goal is to continue making improvements to our working capital as a percent of revenue, excluding cash and we are excited that we have reached our stated goal of around 25%.

While allocating capital towards inorganic growth is important, we want to ensure that we are realizing the planned synergies from the 12 acquisitions that we've completed since spinning. To that end, we continued to make good strides in integrating acquisitions in US process solutions and we are excited about our customers pulling this solution into the Permian Basin, Eagle Ford and Cana/Woodford. We will continue to be both selective and opportunistic in our approach to future acquisitions and pursue high value-add deals, which we believe have benefitted the Company and our shareholders thus far.

Before I turn the call over to Dan to review the financials, let me finish where I started. For sure, these have been tough times, but it's the tough times that make you stronger and better. Although I'm not sure of the origin, there is a quote that says when something bad happens, you have three choices; you can let it define you, let it destroy you, or you can let it strengthen you. And there is no doubt in my mind that as an organization we are stronger today than we were two or even three years ago. I'm excited about what is next for us as a company as we move into a new phase of our lifecycle and will benefit from what we've accomplished in the last few years. Take it away, Dan.

Thanks, Robert. It's been over 2.5 years since we were spun off into a separate publicly traded company and the past nine quarters have been quite difficult for our industry. However, I'm as confident as ever in DNOW and our future. We have the best people in the industry and I continue to be proud of the efforts of our dedicated workforce as we created a standalone world-class provider of products and solutions to the energy and industrial markets worldwide.

I am proud to be part of this wonderful team and am grateful for the hard work and perseverance of the DNOW family. We will continue to concentrate on the needs of our customers while focusing on producing long-term value for our shareholders.

Robert discussed our business and I will say more about our financials. NOW Inc. reported a net loss of $71 million or $0.66 per fully diluted share on a US GAAP basis for the fourth quarter of 2016 on $538 million in revenues. This compares with a net loss of $56 million or $0.53 per fully diluted share on $520 million of revenue in the third quarter of 2016.

When looking at the year-ago quarter, we had a net loss of $249 million or $2.33 per fully diluted share on revenue of $644 million for the fourth quarter of 2015. It is worth noting the fourth quarter of 2015 included $138 million of non-cash charges associated with goodwill impairment. The fourth-quarter 2016 results included $2 million in pretax, severance and acquisition-related charges and $39 million of after-tax charges for valuation allowances recorded against our deferred tax assets. After adjusting for these items, our fourth-quarter loss was $31 million or $0.29 per share, both non-GAAP measures.

Gross margin was 16.4% in Q4 and for the full year compared with 16.7% in Q3 and 16.5% in the year-ago quarter. The Company generated an operating loss of $47 million in Q4 compared with a loss of $53 million in Q3. Fourth-quarter EBITDA, excluding other costs, a non-GAAP measure, was a loss of $31 million, sequentially improving by $9 million.

For the full-year 2016, our revenues were $2.1 billion with some 69% in the US, 19% international and 12% in Canada. We had an operating loss of $222 million and EBITDA, excluding other costs, was a loss of $164 million in 2016.

Looking at operating results for our three reportable geographic segments, revenue in the United States was $379 million in the quarter ended December 31, 2016, up 2% over Q3. Fourth-quarter revenue in the US was down 12% from the year-ago quarter with the decline being less in the 22% fall in the year-ago US rig count, and acquisition revenue improved our position. Reduced customer activity certainly contributed to these year-over-year revenue declines.

Fourth-quarter operating loss in the US was $43 million compared with a $46 million loss in the third quarter of 2016 and a $45 million loss in the year-ago quarter, excluding goodwill. Lower market activity adversely impacted these periods.

In Canada, fourth-quarter revenue increased 9% sequentially to $73 million as activity improved, but was down 8% from Q4 2015. For the three months ended December 31, 2016, Canada's operating loss was $2 million, the same as Q3 and compares with a $1 million operating loss in Q4 2015.

International operations generated fourth-quarter revenue of $86 million, which was up 6% over the third quarter of 2016 and down 35% from the year-ago quarter. Additional revenue provided by acquisitions was offset by decreased international rig activity and reduced customer spending as they use their own inventory.

International operating loss for the fourth quarter of 2016 was $2 million compared with a loss of $5 million in the third quarter of 2016 and an operating profit of $3 million in the year-ago quarter.

You will recall that we moved from two to three revenue channels in the US adding process solution to our existing US energy and US supply chain. For Q4, US revenue channel showed 49% US energy, 36% US supply chain and 15% US process solutions.

Continuing on our income statement, warehousing, selling and administrative expenses were $135 million in Q4, down $5 million from Q3 and down $17 million from Q4 2015.

We continue to show progress with our cost-cutting initiatives. It should be remembered that we have acquired 12 companies adding to these costs. These costs include branch and distribution center expenses, as well as corporate costs.

Our effective tax rate for 2016 was a negative 1.6%. Our effective tax rate continues to be impacted by a valuation allowance recorded against our deferred tax assets in the US, Canada and other foreign jurisdictions. Our effective tax rate for the fourth quarter was impacted as a result of making a federal tax election to treat the Power Service acquisition as an asset acquisition for US income tax purposes. This should provide for a substantial tax benefit to the Company in the future.

Turning to the balance sheet, NOW Inc. had $506 million of working capital, excluding cash at December 31, 2016, which was 24% of 2016 sales, quite an improvement from last year. Accounts receivable increased slightly in Q4 after eight consecutive quarterly declines reflecting revenue increases and customers holding onto their cash at year-end. We reduced AR $0.5 billion in the past two year.

The pace of bankruptcies in our energy space is easing as recovering oil prices probably saved many companies. As they emerged from bankruptcy, they often exchanged debt for equity giving them a clean balance sheet so we must continue to be diligent as we extend credit.

Our current days sales outstanding were 60 days, an improvement over last year and I am pleased with this progress. Inventory was $483 million at the end of the year, a reduction of $49 million in Q4. We have reduced inventory more than $450 million since the start of last year.

With signs of an improving market, we are seeing leadtimes extended for certain items. This might be the bottoming of inventory levels. Inventory turns were 3.7 times, which is an improvement over the last few quarters. Days payable outstanding were 50 days. Cash totaled $106 million at December 31, 2016, with $90 million located outside the US, about a third of this being in Canada.

We ended the quarter with $65 million borrowed on our credit facility, down $80 million in Q4. So at December 31, 2016, we were in a net cash position of $41 million. Our borrowing cost on the debt is slightly above 3%. Capital expenditures during Q4 were approximately $1 million, which we have averaged each quarter of this year.

Free cash flow for the fourth quarter was $48 million and totaled $231 million for the year.

Our worldwide market continues to be challenging, but the worst may be over with improving oil prices. The prospects are certainly better than they were a year ago. In the meantime, we will continue to focus on serving our customers as we manage costs and concentrate on integration gains from our acquisitions. We have confidence in our strategy, in our employees and in our future as we position NOW Inc. to serve the energy industrial markets with quality products and solutions.

We are an organization with an experienced management team, strong financial resources and we will continue to respond to the needs of our customers. With that, Sylvia, let's open it up to questions.

Thank you. (Operator Instructions). David Manthey, Robert W. Baird.

First off, a question on the EBITDA breakeven levels. If $650 million is the new breakeven and you compare that to the $538 million in the fourth quarter, that $31 million swing in EBITDA would imply contribution margins in the high 20%s and if you do the same for the $2.1 billion versus $2.6 billion, you come up with something even higher in the 30%s. So I am just wondering is the 15% to 20% contribution margin you are talking about, is that simply conservative or are you thinking about the mathematics differently here?

Over time, we expect flowthroughs in the 10% to 15% range. We have talked about premium flowthroughs as we begin this recovery, so getting to that breakeven at $650 million, we think we will be in the 20% range. As we have some slack in the system, we need to [reign] in and as efficiencies are driven by increased sales.

We also believe we will see price appreciation as we are beginning to see positive trends with extended leadtimes on products and things that would eventually bring some price appreciation. So that coupled gets us to that $650 million level.

Now we are guiding to, on a quarter basis, getting to breakeven. We haven't talked about the full-year results and what we expect for the full year.

Okay. And along those lines, Dave, when you are talking about inflation on the rise potentially and demand picking up plus your new pricing tool, is it safe to assume a meaningful uptick in gross margin in 2017 as all those things conspire?

I think it will be a noticeable uptick in gross margin -- should come from -- our inventory liquidation has been very successful. So we will have lower replacement costs on inventory. We will begin to see vendor consideration increase. We are still in a very competitive landscape, but those things should conspire to drive increased gross margin.

Great. Thank you.

Matt Duncan, Stephens.

So the first thing I've got, just looking at the sequential progression in the business -- Robert, you talked a lot about what the -- explained well I think what that lag time is because you guys are more impacted by tank battery spending. I'm curious if you were still maybe also seeing a little bit of pressure in the fourth quarter. Is it because your customers were still operating under their 2016 budgets? And then adding to that, as the calendar has flipped to 2017, are you guys starting to see a more noticeable sequential improvement in sales here?

Yes, so within Q4, which was an abnormality again because our Q4 is usually softer than Q3, but within Q4, each month of the quarter progressed upward. So December was better than November and November was better than October and usually December is the worst month of the quarter. So we saw a growth there and then as we get into Q1, we are experiencing what you would expect to experience based on the rig count additions from late Q3, early Q4 being stronger than they were Q2 to early Q3.

So I guess to tie a bow on this, is the growth accelerating as you would expect it to now that you are through that lag period between when rig count went up and tank batteries get built?

That would be correct.

Okay. Figured as much. And then back on the incremental margin question. It sounds like you do expect to experience a period here of above your target range. Is there any help you can give us on how long that may last? Once you reach that EBITDA breakeven number, is that when maybe it gets back down into that 15% to 20% target range? Really what I am getting at here is how long do you guys think you will continue to sit on costs before you will need to start to add people back to make sure you are serving the customer well?

Well, we are currently -- there are parts of our business where we are adding people. Robert talked about the contract win with Marathon Oil, so there are pockets where we are adding people already, but we do have slack in the system. So it could be several quarters where we will see flowthroughs higher than what we would normally expect. It's hard to gauge that. It depends on the slope of the recovery.

If you look back in 2009, Matt, when we came out of the financial crisis and we had that strong recovery, there was a few quarters, maybe two or three, I can't recall exactly how many, where we had high 20%s in flowthroughs.

But I would be careful modeling that -- we talk about 10% to 15% flowthrough and, Matt, I would keep that in mind that we are going to get back to that piece and the further out you go, I wouldn't be real aggressive. I would stick with that 10% to 15% on a longer-term basis.

And the real answer is, Matt, just like it is when we are in a strong downturn, we can't get costs out as fast as revenue comes out. So our decrementals flowthroughs are also in that high 20%s range. So it's just a function of trying to catch revenue going up or down.

Sure. All right. And then last thing on free cash flow, any thoughts there on what that may look like this year? You talked about inventories have probably bottomed. I'm assuming that we are reaching that point where a working capital investment is necessary. What do you think that looks like from a cash flow perspective?

I think we have been pretty proud of the work we've done on generating cash in this downmarket, but we've been talking about the inevitable turn when revenue picks up and there will be some demands on the working capital side. And I think every quarter, I keep thinking we are getting near not only the low-hanging fruit, but getting near the end and here again this last quarter we did another $40 million or $50 million.

But that is getting slower and slower and we are going to be turning around spending money very soon and that's a positive because it means the revenue demands are up and we have to be doing it. So again, if I'm doing a modeling exercise, I would be very careful with modeling much favorable cash flow into 2017.

Yes. Based on whatever revenue you forecast for the business, you can assume that the amount of capital we are going to need is going to be in that 25% or (inaudible) range.

Yes. Okay. Appreciate it, guys. Thanks.

Vebs Vaishnav, Cowen and Company.

So you spoke favorably about the US revenues. Just trying to think about some numbers. Let's say even if we assume a quarter lag in revenues because of the lag you explained, is it fair to assume that US revenues could grow say 10% to 15% in 1Q given that the rig count increased 15% in third quarter?

Well, based on what we have experienced so far in the quarter, which is clearly related directly to the rig count adds from late Q3, early Q4, we think that that puts current consensus on revenue for the business within reach.

Okay, okay, okay. And for Canada, if I think about the rig count, where it is currently, it's almost up 100% versus the fourth-quarter average. How should we think about Canadian revenues, the leverage that you have with the increasing rig count over there?

I would expect Canada -- with the customers that spend money with us that are related to upstream activity, which would be the operators and the drilling contractors, we had a nice growth in that business; I think I said 50% or something of that nature. It was offset by non-upstream businesses that shrunk.

Q1 is typically Canada's best quarter and they will hit a wall somewhere either mid or late March. They are going to hit breakup and it's going to drop drastically. So the timing of breakup will really affect how Canada does in the quarter and it's really hard to forecast breakup.

Okay. 15%, 20% versus the rig count of 100, whatever it ends up being, it's not unreasonable to think about as we know now? Is that fair?

I don't think I understood the question, Vebs. Can you repeat it?

The Canadian revenues, they can grow sequentially 15% to 20% given a significant increase in rig count. Is that a fair way of thinking or am I missing something?

No, that could be the case, with the potential offset of something else, but I don't expect the softness we saw in the non-upstream markets to repeat or get worse in Q1, let's put it that way.

Okay. And last question for me, SG&A. How should we think about SG&A going forward? Do we have still ability to cut costs and first quarter should be lower than fourth quarter, or how are you thinking about it now?

While we are having a recovery obviously in our business, there are places in many of our areas that are not having a recovery. And so we will continue to work costs down, but with the surge we are having in certain shale plays and with the implementation of Marathon, those expense increases will probably offset the cuts elsewhere.

Okay. That's all for me. Thank you.

Andrew Buscaglia, Credit Suisse.

Can you just talk a little bit about -- so your $650 million target now for breakeven, that was a big change from Q3 to Q4. Besides maybe just rig counts picking up, what else gives you confidence that you could make that statement? Is it stuff you are hearing from customers, just general optimism post-election? Maybe you can rank file what (multiple speakers).

The revenue that we are experiencing in the quarter has nothing to do with calculating the breakeven. Basically breakeven is a function of what we think is happening with pricing and how we are managing our expenses. So that's the driver behind that. So we continue to pull cost down. We are looking at what we think flowthrough to EBITDA will be on the incremental growth from $538 million or whatever the number was to $650 million and that's how we came up with getting to a breakeven EBITDA.

And then on that pricing comment, so last quarter you guys said at the branch level you are trying to push prices, but it's not sticking. I guess now you have this technology that's going to help you guys. Pricing-wise, it sounds like things should improve, but are you seeing it stick now?

Well, we are seeing some price improvements for some of the commodities where the leadtimes are extending, but we are also seeing a mix issue. We are selling more pipe today. Pipe generally has lower margins, so that's offsetting that somewhat.

The pricing tool will help us two ways. It will help us find the right strike price for a transaction, which could mean lower. So we'd get a sale we wouldn't otherwise have gotten, or higher. Of course, we bought the tool to help us grow prices. But what we tend to experience in a recovery like we are seeing is a customer focused on the bigger picture and a little bit of distraction and improved pricing resulting from a lot less bidding. Today, we are bidding most of our transactions and that will ease up as customers' focus shifts.

Yes, we have pricing agreements in our system for most of our customers. So if you just plug in part numbers and quantities, it automatically prices the customer at the agreed-to level that we set in our contract. And generally, those are fairly good margins. But what happens and what we have just been through, this downturn, they may have had a policy before the downturn that said anything over $25,000 has to go out for competitive bid. Then they dropped it to $20,000. Then they dropped it to $15,000. Then they dropped it to $10,000. So we are in the point where we are bidding almost everything and when we get busy again and leadtimes, service levels, product availability becomes more important and they start ratcheting back up that bid level because they don't want to waste the time and effort for days and days to go out and get competitive bids and so they just order the material. So that usually helps drive pricing up.

Okay. Okay, all right, that's helpful color. Thanks, guys.

Joe Gibney, Capital One.

A couple questions on US revenue and mix. I was curious as we are sitting here mid-February, what is the non-upstream portion of your US business doing here so far? As you intimate, it is up quarter-over-quarter revs, but just trying to understand how the E&C project, chem plant, utility/refiner bucket is turning so far here in the quarter and how we should be thinking about that relative to what's happening upstream.

Yes, so obviously upstream, with the contractors and service companies and operators, is where we are experiencing the most growth. Our downstream business is gearing up for some turnaround activity, which will help it grow, but our midstream business is down simply because we had two huge projects that wound down and they were just a two or three or four-quarter kind of project that ended. And so our midstream business is softening in the quarter.

Okay. And on your mix, supply chain and process, so quarter-over-quarter, the implication there is supply chain is up 10%, 11% versus 3Q. Just curious the drivers there. Is that just broader organic activity lift that is flowing through here just as it is with everywhere else or is this Hess ramping up a little bit more? Just curious if you could speak to that a little bit.

And then process generally flattish and I think we are expecting a little bit more flowthrough coming out of Power Services and some of those POs translating into revenue. You guys had always been pretty consistent in that as more a 1Q timeframe, but how is traction in the Permian? How are things going with Power Services there? If you could speak to those, I would appreciate it.

So within our supply chain group, there's really three customer types. You've got the shop floor manufacturing supply chain business; you have the downstream chemical plants and refineries; and then you've got our four operator customers. And we had softness in the downstream business in Q4 and the shop floor manufacturing business was basically flat and so the growth came from two areas. One, the increased activity with our two core or tenant customers, Devon and OXY and continued implementation with Hess. That's where the growth came from in the supply chain group.

On the process solutions group, we expected -- in fact, we said it on the last call -- we expected process solutions to bottom out in either Q4 or Q1 based on what we had in our order book and it turns out that it bottomed in Q3 and I would expect some soft growth in that business into Q1 simply because those orders are usually placed on us when the drilling is occurring and so they don't have that material delivered to location until after the frac job is complete.

So we got some quarters that were not tank battery-related in the process solutions group, which is Odessa Pumps and Power Service and we were able to turn around some of those orders for fluid transfer applications quicker than we thought and that's what helped the group grow slightly in Q4 versus Q3.

Okay. Helpful. I appreciate it guys. I will turn it back.

Sean Meakim, JPMorgan.

So just thinking about that revenue cadence, so the US rig count was up something like mid-teens sequentially in 3Q, low 20%s last quarter. Maybe it will be up something like around 20% this quarter. So you said 1Q consensus seems like it is in reach. I'm thinking -- I'm curious if you look under the hood at the mix as you are onboarding some of these folks like Marathon and Hess, how do we think about the mix between energy branches, supply chain, process solutions and what that mix is doing to top-line opportunities versus what the broader market is doing?

I wouldn't expect the supply chain mix to change much because, first of all, it takes many quarters to implement these agreements, so we will be talking about the one we just received for a while. The other one with Hess is almost complete and as we grow with those customers in our supply chain group, our branches are also growing with all of their operator customers in the area of tank batteries. So if I was to be a betting man, I would bet that the energy center business grows at a more rapid rate than the supply chain services group because it's just the behemoth; it's the big gorilla. So it's just going to grow dollar-wise more. I would think the ratios might stay similar.

Okay, so as we move forward here, the expectation would be that you are eventually going to -- as we get several more quarters under our belt, you are going to catch up to the delta we have here between now and where rig count has gone?

Yes, the only caveat to that would be, if you look at our revenue change in the quarter, it looked a lot like the rig count movement three to four months earlier. The only caveat to that would be is bottlenecks with fracking. I don't know how that is going to impact completions because it's already -- the DUC count is already growing in the Permian and that's where most of the activity is. So how and when that gets addressed will affect us. It's impossible to forecast that.

The sand demand -- I've seen delays in people getting sand, frac crews getting equipment refurbished, issues trying to staff the spreads. So that will be a bottleneck that could affect everybody behind the frac job.

Okay. That's really fair. And just to follow up on the working capital line of questioning from earlier, congrats on that net working capital sales metric. I know you've been working toward that for a long time. As we think about the recovery, as Dan talked about the inflection going the other way, is the expectation that you are going to be able to maintain that ratio into improving activity?

You talked earlier also about the need to ramp, and pre-place some orders in advance. Just trying to get a sense for how that cadence plays out as you are trying to stay ahead of the market in a recovery.

I think what we will see, Sean, is improved turn rates, improved DSOs, but certainly absolute additions to those assets, but we will turn them faster and so we expect to be in that 25% working capital range or better given the movement in revenues. But we don't see that number worsening in the coming quarters.

No, I would expect and again, I always talk about your modeling because you guys usually have modeling questions for me when you call me, but I would be modeling 20% to 25%. 25%, we would hope to do better than that. We did 23.5% this quarter and going ahead, I'd feel comfortable with saying we'd be in the 20%, 25% range. We won't be back in the 30%s like we were before. We've taken some -- we've made improvements in processes and all and I'm pretty confident of that, Sean.

Okay, great. That's very helpful. Thanks, guys.

Walter Liptak, Seaport Global.

I wanted to ask about pricing in the fourth quarter. Are you seeing any product pricing improving yet?

In the fourth quarter?

Yes, in the fourth quarter.

No, no, pricing is still pretty flat. If you take out the mix issue, we are seeing some improvements, but overall given that pipe is now -- we are seeing an increase in pipe sales, the overall margins haven't changed much. We do expect to have some inflection in the coming months and quarters for sure.

Okay. The branch-level incentive plan that you talked about, is that something new that's related to the new technology? How should we be thinking about that versus maybe where you were in the last cycle at this point?

This is a plan that we put in place in the early 2000s timeframe when we broke this business out from under NOV's corporate incentive plan and it is a branch-level plan. And so they simply make each quarter a larger pool of bonus amount based on how well they push gross margins and how well they manage expenses and how well they grow marketshare.

So it's a pretty powerful plan; it worked well. That's the reason it has been in place for 10 to 15 years. It's produced pretty great results for us over the years. So generally, the better you get your ratios, the more money you get in a quarter.

Okay, that's great. And then wanted to ask about pipe supply. I know that you guys have a very diversified pipe supply. Are you thinking any different about imports from outside the US now and we've heard about US pipe mills ramping production. Could this business turn into a good business this time around?

Pipe, generally, if you take out horrible deflation periods, is a good business for us and based on import duties and all sorts of other political scenarios, our purchases ebb and flow from domestic to international to both and the ratios move. So if someone were to put another tariff in, I'm sure that would affect where we are getting our pipe, but we have sources for pipe in many, many, many countries. So we are pretty fluid at being able to shift those purchases.

Okay, great. All right, thank you.

We have no further questions at this time. I will now turn the call over to Robert Workman, CEO and President, for his closing statements.

I'd like to thank everyone for their interest in DistributionNOW and we look forward to talking to you in May. Thanks.

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