DNOW Inc (DNOW) 2018 Q1 法說會逐字稿

Welcome to the First Quarter 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, Dave Cherechinsky. Mr. Cherechinsky, you may begin.

Thank you, Sylvia, and welcome, everyone, to the NOW Inc. First Quarter 2018 Earnings Conference Call. We appreciate you joining us this morning, and thank you for your interest in NOW Inc. With me today are Robert Workman, President and Chief Executive Officer of NOW Inc.; and Dan Molinaro, Executive Vice President. NOW Inc. operates primarily under the DistributionNOW and Wilson Export brands, and you'll hear us refer to DistributionNOW and DNOW, which is our New York Stock Exchange ticker symbol, during our conversations this morning.

Before we begin this discussion on NOW Inc.'s financial results for the first quarter of 2018, 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 U.S. 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 U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental, financial and operating information may be found within our earnings release, on our 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 U.S. GAAP, you'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs; net income or loss, excluding other costs; and diluted earnings or 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 of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the quarter. A replay of today's call will be available on the site for the next 30 days. We plan to file our first quarter 2018 Form 10-Q today, and it will also be available on our website.

But first, let me turn the call over to Robert.

Thank you, Dave, and good morning, everyone. I want to thank each of you for taking the time to join us today. This morning, I'll review our key financial metrics and go over our strategic progression and business segment highlights. Then I'll turn over the call back to our CFO, Dave Cherechinsky, for a more detailed review of the financial results before he returns it to me for closing comments.

In speaking with customers, suppliers, other oil and gas market participants and experts, most note the worst of the cycle is behind us, finally. We generally agree as we saw increased revenues across all reporting segments with notable growth in our U.S. operations, both sequentially and year-over-year. We finished the first quarter of 2018 with revenue of $764 million, up $133 million or 21% from the first quarter of 2017, exceeding expectations. Our revenue growth outpaced global average rig count growth, which was up 12% year-over-year. Geographically, year-over-year, the U.S. top line increased 28% followed by a Canadian increase of 6% and then international at 4%. In the U.S., Energy centers made up 53% of U.S. revenue, followed by supply chain services at 33% and process solutions at 14%.

Gross margin percent was up 30 basis points as margin gains in the U.S. were offset by product margin declines in Canada coming off their 4Q highs. Warehouse, selling and administrative expense was $141 million for the quarter, as expected, and up $3 million sequentially, excluding the $10 million gain in 4Q 2017, related to the sale of a property in California that we mentioned on the 4Q call.

Expense control during the period and a lot of the elevated revenue growth reflects our focus on cost rationalization and value optimization, including the closure of 8 locations this quarter and 30 in the last year in slower areas as well as hiring in areas of increased activity.

EBITDA, excluding other costs, was $16 million, up year-over-year by $25 million.

As a result of our strong top line growth and excellent operational execution, net income, excluding other costs, was $1 million, or earnings per share, excluding other costs, of $0.01.

Our results show we started the year strong, and we have an optimistic outlook for the remainder of 2018, as U.S. fundamentals continue to improve. Our 1Q financial performance gives us greater confidence in the upper end of the guidance we gave on the 4Q call of low double-digit to mid-teen growth for the full year of 2018, and could even stretch to high teens if current conditions persist.

We do however remain cautious due to the unknown downstream effects of trade policy changes, impacts of potential consolidation in the shale plays, market and product pricing pressures, the ongoing offshore drought and general unease and noted softening in Canada.

Our robust first quarter performance was a result of our employees' hard work as they executed against our 4-pillar strategy. These pillars include maximizing our core operations, driving margin expansion, leveraging our acquisitions and approaching capital allocation with discipline. With the ongoing successful execution of these strategic pillars, we can deliver the gains our shareholders expect. And we made excellent progress on all 4 pillars in the first quarter.

In the area of maximizing operations, we continue to evaluate our footprint and adjust as the market requires. As I said, we closed 8 locations and opened 1 in line with market activity. Another example of our continued focus in this area is our agreement to partner with key manufacturers, allowing us to meet increasing demand across Texas, the Rockies, North Dakota and Oklahoma, where recent lead times has been up to 3 months.

Additionally, there are several human capital efforts underway in the Permian basin to strengthen our position and gain market share there. That includes heightened training and recruiting as well as relocating key managers. We're also making progress on margin expansion. In addition to capitalizing on the strong market environment, we're enhancing operating margins by leveraging an improved quoting process that enables us to process a higher volume of quotations across markets.

Our continued commitment to stock a comprehensive breadth of inventory enables us to not only get better manufacturer pricing but allows us to integrate certain products, like an air compressor or a [multi-plugs pump] product, into our marginal orders on one skid. This vertical integration gives us advantages over competitors that must buy items from other regional distributors. Pricing adjustments related to Section 232 activity are integrated into our pricing and quoting processes as applicable. We're also driving internal collaboration to leverage total package solutions and utilizing our own expertise instead of outsourcing.

In addition, we're continuing to push technology usage in the field allowing customers to have the ability to acquire thousands of products from any of our approximately 275 locations, including our regional distribution centers or online. In terms of leveraging our recent acquisitions, we continue to see cross-selling of products from our acquisitions. For example, Odessa Pumps is selling instrument air compressor units and Power Service is selling reciprocating water injection pump packages. The strong collaboration between energy centers and process solutions is resulting in pull-through sales, new customer introductions and increased market opportunities. As evidence of this, we recently received a sizable modular component order from a new customer, one of the largest operators in the Permian.

This process solution's win, which will take several quarters to fabricate and deliver, has opened the door for our energy centers to provide all of the pipe, valves and fittings, or PVF, required for the installation and operation of our modular solutions, an order that our U.S. energy centers likely wouldn't have received without our ability to bundle with our process solutions offerings.

As well, expanded valve modifications, now offered by our Total Valve Solutions group, improved our cost position on recent midstream, high-value valve and valve actuation projects.

Our fourth pillar is approaching capital allocation with discipline. To that end, we improved inventory turns to 4x in 1Q, while DSOs marginally increased by 1 day to 59 and DPOs remained flat. Working capital, excluding cash as a percent of revenue, dropped to 22.3%, as expected. We're confident that the execution of our strategy will drive long-term shareholder value, as outlined. We are making progress on each of the 4 pillars.

Turning to look at the market indicators for DNOW. Let's start with WTI and rig count. WTI hit $66 per barrel in the quarter and led to a U.S. rig count average of 965 for 1Q '18, up 31% from 739 a year ago. In Canada, average rig count moved from 299 in 1Q 2017 down to 273 in 1Q 2018. When comparing the 2018 breakup period on a week-by-week basis to the one in 2017, this particular freeze-thaw cycle is more severe.

International rig count is up from the prior year average by 3% to 970 in 1Q 2018 from 939 a year ago quarter. WTI pricing remaining in the current range is a positive trend for our global energy centers and other U.S. operations. Our second indicator is drilled but uncompleted wells or DUCs. According to the EIA, March ended with a DUC count of 7,692 wells. Keep in mind that the declining DUC growth trend is favorable as it represents wells being completed and the opportunities for our business to participate in that activity. The third indicator that we evaluate is completions. Completions continue to grow in 1Q even though there were 331 more wells drilled than completed in the quarter. Like the DUCs, we continue to believe that this trend is favorable for our business. Based on all 3 indicators, we believe DNOW is positioned well to take advantage of the improving market.

Turning to our reporting segments, let's start with our largest segment, the U.S.

U.S. revenues were $562 million, up $123 million year-over-year or 28%. Incremental operating profit flow-through was 24% year-over-year. Sequentially, revenues were up $74 million or 15%, outpacing rig count growth in that same period. Sequentially, 1Q operating profit incremental flow-through was strong at 19%, excluding the $10 million benefit of the properties sale in 4Q 2017. An improvement in rig count and our focus on tightly managing expenses produced these strong flow-throughs. Strength in the Permian and with large supply chain customers in particular drove more than half of the U.S. growth and help drive gains in excess of rig expansion growth.

Looking at the specific operations within the U.S., the U.S. energy center's business reported significant gains from several large customer orders. The Permian had the largest revenue increase, with slight increases in the Rockies, South Texas, Bakken and San Juan basin. We gained market share in these areas by adding 3 new customer accounts. We also saw the greatest increases from midstream projects in the Mid-Continent area. Midstream top customer activity was strong in the quarter, though it was offset both by revenue disruptions from the nor'easters that made it difficult for some customers to accept shipments as well as lack of visibility around the potential impact of the new trade policies.

Product availability will be more difficult for many distributors, especially those that were more reliant on import sources and did not have good domestic sources as we do. We have both import and domestic sources and have been shifting as required to maintain our service to our customers.

Due to increased volume, many domestic manufacturers are not taking on new distributors, but continue to supply their existing partners.

Moving forward, assuming that rig count and commodity price trends continue and there are no major supply disruptions, unforeseen events or major inclement weather, we see a continued positive trend for our U.S. energy center business revenue. The Permian will likely lead activity gains.

One potential disruptor is the tariffs and the downstream impact from those. U.S. supply chain was up 37% year-over-year and 19% sequentially. The sequential growth was primarily from increased activity with our SCS integrated supply energy customers as well as from our downstream and industrial business, which added a new ExxonMobil pipe, fittings and flanges, or PFF, contract, and saw the completion of several turnarounds. Machine Tools Supply also added a new manufacturing customer in the quarter.

U.S. supply chain energy customers grew as a result of large construction projects in the Delaware basin with continued partnership with OXY and Marathon, capital projects from Hess and Devon and a steady flow of orders for fabrication work in Texas. U.S. supply chain services may be down slightly in future quarters due to sizable 1Q project-related swings in activity, a decrease in turnaround activity and branch restructurings.

For U.S. process solutions, we saw 14% year-over-year revenue growth and 4% sequential growth. The Power Service business order activity is promising, adding customer orders for LACT units, saltwater disposal packages and ASME vessels in the quarter. Odessa Pumps also added new midstream customers in the quarter. The Permian remained the most active region for U.S. process solutions, with the Bakken, DJ, Powder River and Eagle Ford seeing increased activity as well. As oil prices remain at current levels or rise, this should lead to an increase in well completions, which bodes well for the process solutions business. There are several projects set to be awarded or to begin in 2Q. These include produced water disposal pumps, large LACT units, actuated valves and vessels for new and existing midstream and upstream customers.

Turning to our Canadian operations. Canadian revenue was up 6% year-over-year at $102 million. 1Q is usually our busiest Canadian quarter, as the January through March freeze is our coldest part of the year and the frozen ground allows for better site access. Sequentially, revenue is up 20% stemming from the seasonal increases, including market share growth from 2 new customers in the quarter as well as a -- the favorable impact of foreign exchange rate fluctuations.

Moving into the second quarter. Canada will experience breakup, as the freeze-thaw cycle has historically reduced our Canadian revenues as much as 35% sequentially. Our optimism from market share gains and growing midstream customers is dampened by export pipeline constraints, the current regulatory environment and Statistics Canada's prediction of decreased capital spending in Canada for 2018. As a result, we are cautious about our Canadian operations for the next few quarters.

Finally, the international segment reported revenues of $100 million. This segment is up 4% both year-over-year and sequentially. Gains in the quarter were due largely to favorable foreign exchange rates year-over-year and customer contracts in the Middle East, Europe and Australia.

We are starting to see several green shoots internationally from Asia Pacific, the Middle East and North Africa for some new builds, a recent tender out of Europe and new electrical and cable frame agreements. However, that is all tempered by the unknown implications from Section 232 for import materials shipping from the U.S.

As I said earlier, assuming that business drivers and commodity prices maintain their upward trends and that there are no major supply disruptions or unforeseen events, we are optimistic about DistributionNOW's near-term prospects.

With that, I'll turn the call over to Dave to review the financials.

Thanks, Robert. For the first quarter of 2018, the company generated $764 million in revenue, an increase of $95 million or 14% sequentially; and growth of $133 million or 21% from the same period in 2017. This marks the strongest sequential quarter revenue gain, on an absolute dollar basis, since 3Q '14.

Gross margins grew to 19.4% in the first quarter, up from 18.1% in the same period of 2017, the highest levels for gross margins since the fourth quarter of 2014. Warehousing, selling and administrative expenses or WSA was $141 million, in line with our $140 million range guidance. This was just $1 million more WSA than the second quarter of 2016, which since then on a run-rate basis, we added $1 billion in revenue to our business. In other words, the same level of expense for a business now $1 billion larger. In 1Q '18, WSA was up $3 million sequentially, after excluding a $10 million gain on the sale of property from 4Q '17. We expect WSA to be in the low to mid-140s range per quarter for the remainder of the year.

Operating profit was $7 million or 0.9% of revenue compared to an operating loss of $21 million or negative 3.3% of revenue in 1Q '17. Net income for the first quarter was $2 million or $0.02 per diluted share, an improvement of $25 million when compared to the corresponding period of 2017. Our effective tax rate for the 3 months ended March 31, as calculated for U.S. GAAP purposes, was 24.1%. As our profitability increases and when we are no longer subject to a valuation allowance in the U.S., we expect our effective tax rate to be in the mid- to upper 20% range.

On a non-GAAP basis, EBITDA, excluding other costs, was $16 million or 2.1% of revenue for the first quarter of 2018. Net income, excluding other costs, was $1 million or $0.01 per diluted share. Other costs after-tax for the quarter, included a $1 million benefit from changes in the valuation allowance recorded against the company's deferred tax assets. We excluded this gain to arrive at the net income excluding other costs.

In 1Q '18, we continue to evaluate the provisions of the Tax Cuts and Jobs Act as well as all interpretive guidance issued to date. We have not completed accounting for all the effects of this new law, but have recorded provisional amounts which we believe represent a reasonable estimate of the accounting implications of the tax act. In April, guidance was issued by the IRS and Treasury Department, which clarified that we could elect out of using our 2017 net operating losses when computing the onetime transition tax. Therefore, we recorded adjustments to provisional amounts originally recorded at December 31, 2017. We excluded this impact in computing net income excluding other costs for the 3 months ended March 31, 2018.

Moving to our segments. Every reporting segment experienced growth year-over-year and sequentially. U.S. revenues grew to $562 million, a 28% improvement from the first quarter of last year, driven by an improvement in U.S. rig and completions activity. Canadian revenues were $102 million, up 6% year-over-year, despite a decline in Canadian rig count, the growth due primarily to a favorable foreign exchange rate. And internationally, revenues were $100 million in the first quarter of 2018, up $4 million from a year ago, also as a result of foreign exchange.

Moving on to operating profit. The U.S. generated operating profit of $3 million or 0.5% of revenue, an improvement of $29 million when compared to the corresponding period of 2017, improving primarily due to significant revenue increases, coupled with flat operating expenses. Canada operating profit was $4 million or 3.9% of revenue, an increase of $1 million when compared to the corresponding period of 2017. The gain's attributable to improved product margins in the period. International operating profit was 0, a decline of $2 million when compared to 1Q '17. Despite the increase in revenue discussed above, operating profit declined primarily due to increased bad debt charges in the first quarter of 2018.

Turning to the balance sheet. Cash totaled $80 million at March 31, 2018 with $68 million located outside the U.S., half of that being in Canada and the U.K. We ended the quarter with $175 million borrowed under our revolving credit facility and a net debt position of $95 million when considering total company cash. Our debt-to-cap was 12.8% at March 31, and we had $452 million in availability. Our borrowing cost on the debt approximates 4%, and we expect the Fed to continue to push short-term rates incrementally higher as they attempt to fend off inflation. Working capital, excluding cash as a percent of revenue, was approximately 22%, under our target of 25%. Accounts receivable were $496 million at the end of the first quarter, up $73 million, as our DSOs moved to 59 days.

First quarter inventory levels were $609 million, turn rates were 4.0 in the first quarter and in our guided range of 4 turns or greater. Accounts payable were $331 million at the end of the first quarter, with DPOs flat from year-end at 49 days.

Cash flows used in operations was $30 million for the first quarter with capital expenditures of approximately $1 million, in line with our previous guidance, resulting in free cash flow used in the quarter of $31 million. Finally, we are pleased that on April 30, we successfully closed on a new 5-year $750 million global senior secured credit facility with the potential to increase it to $1 billion under certain conditions. This new facility replaces the senior secured $750 million revolving credit facility expiring in April of 2019. The new facility has no financial maintenance covenants. And in addition, our new credit facility has better pricing when compared to our previous facility, allowing us to execute on our growth priorities while lowering costs. Our new credit facility expires in April 2023.

With that, I'll turn the call back to Robert.

Thanks, Dave. Let's wrap-up the outlook for the remainder of 2018. Our outlook is tied to global rig count and drilling and completion expenditures, particularly in North America. Oil processed and U.S. oil storage levels will continue to be primary catalysts for determining U.S. rig activity.

Our approach continues to be to advance our strategic goals and manage DNOW based on market conditions. Before I move on to recognize one of our dedicated employees, I'd like to summarize the progress we've made in the execution of our 4-pillar strategy. We maximized our operations by adjusting our footprint in line with customer demand and by optimizing our human capital and supply relationships. We executed on margin-enhancement initiatives by improving our quotation and pricing processes, expanded our breadth of inventory and driving intra-company collaboration. We leveraged the acquisitions through enhance cross-selling and collaborations, and we approached capital allocation with discipline, improving inventory returns.

With the further successful execution of our strategy, we fully expect continued improvements towards generating shareholder value.

With that, let me recognize one of the employees whose daily hard work and dedication enable us to deliver on our promises.

Dave Dybala's extensive 44-year career with DNOW, started as a warehouse driver for Wilson Supply in Houston when the Oilers started playing in the Astrodome and Dan Pastorini was still the quarterback. David spent nearly his entire career in South Texas, mainly at our Victoria, Texas branch. He and his wife Cathy and 2 children enjoy spending time together as a family on their ranch outside of Goliad, Texas. One of the many feathers in David's cap was his leadership over one of our largest branch projects in 2009. It involved a South Texas customer's critical ramp-up on its Eagle Ford infrastructure and generated nearly $100 million in revenue. It was a challenge but David made it happen. David has been involved in all of the different markets that we serve and has developed many people throughout the organization. His attention to detail and process compliance, extensive product knowledge, markets experience and understanding of the industry make him an ideal mentor for anyone in our company, new or experienced. And when it comes to picking up a tab, many believe they can get a watermelon out of their pocket quicker than David can get a nickel out of his. That conservatism, along with his leadership and years of dedication make it not only an honor for all of us to call David a very loyal employee, but more importantly, a friend. Thank you and your family for all that you do for DNOW, David.

And with that, let me turn it over to Sylvia to start taking your questions.

(Operator Instructions) And our first question comes from Steve Barger from KeyBanc Capital Markets.

The primary question I'm getting right now is about the sustainability of sequential trends in revenue and EBITDA. It sounds like you're feeling a lot better about conditions in the U.S., but with the normal Canadian seasonality you talked about, do you think the consolidated results see those sequential increases into 2Q and 3Q?

Well, 2Q is going to be different than 3Q. 2Q is feeling pretty flattish right now. If you remember, last year, we grew 17% from 4Q '16 to 1Q '17. And then we followed that with 3% sequential growth in 2Q '17. And the differences between last year and now is Canada is going through a more severe breakup than it did last year. International is not going to grow any more than it has in the past until offshore comes back, which we see to be far in the future. 1Q this year had completions delays, from the rails and the weather and all that other stuff, which will translate likely into a little bit of softness in tank battery construction in 2Q, because we lag the completion process of building tank batteries. And our supply chain services group had some very nice projects with almost all 4 of our large energy customers, that likely won't repeat into 2Q. And so considering all of that, it's feeling pretty flattish at this point into 2Q.

Got it. Well, I guess, can you talk about Slide 9 for process solutions? Can you talk about how quoting and booking activity progressed through the quarter and through April? And just how are you set for capacity as you go into 2Q in some of those higher growth areas?

Yes. We feel really good about the amount of orders we received in the process solutions group, which includes Power Service, but Odessa Pumps as well is doing very well. So most of these orders are longer-lead time items that were received in 1Q. So going from 3Q and beyond, they've got quite a bit of work to ship.

And you mentioned the big order from the Permian operator. Is it your sense that if you can deliver to spec that there is a lot more business behind it with that operator? And do you think a successful program with a big player gives you the credibility with other operators that can translate into orders?

Yes. Yes. Yes.

That's great. And then I guess, just any comment on how the offering for modular tank batteries or anything else is progressing in other basins right now?

Yes. So I was just up there, about 2 weeks ago, and recently when we bought Power Service in Casper, everything we saw up there that you might remember -- or I don't know if you've been up there or not, but everything is enclosed back then, so you knew it was all going to the Bakken because they -- you put enclosures over everything due to the weather. I was amazed to see how many unclosed skids were scattered all over those facilities. That means they're all headed to the Eagle Ford or the Delaware or the Midland or somewhere like that. So they're definitely making traction. In the beginning of us trying to penetrate those markets with that solution offering, someone would order like 20 LACT units or someone would order 12 vessels or somebody would order 9 water injection pump packages and -- but no one had really given us the whole suite. They were trying to test our ability to deliver, the quality, so forth and so on. And as of late, now they're ordering 2 and 3 different types of module solutions at a time. So it's definitely starting to get traction.

Our following question comes from Matt Duncan from Stephens.

So look, I want to start with the energy branch business. U.S. rig count was up about 5% sequentially and your business grew more mid-teens. Obviously, completions growth kicking in is helping you, but is that something you think you could continue to outpace, rig count in the U.S.? And if so, what's driving it?

Well, there are several things that drove it, but one is, remember our 4Q was a lot softer than we expected. So some of that was just carryover work from people actually taking vacations and all that neat stuff. So some of that helped out the quarter, but generally, across the board, in the U.S. energy centers, we're seeing nice upticks in orders from current and new customers. So I think we could continue to grow at a faster pace, excluding -- as long as we're excluding the U.S. supply chain services, which I mentioned earlier, had those large projects with OXY, Devon, Hess and Marathon.

Robert, how much did those add up to in total in the supply chain business? How much revenue did you get out of that stuff that maybe doesn't carry forward?

I would assess -- it's hard for me to tell, but -- because some of it happens in the field, and so there's no way to tell -- it's not all shipped out of our project group. But I would have expected U.S. supply chain services to grow at a similar percentage as did the U.S. energy centers, and so the delta is probably the change between those 2 ratios.

All right. That helps. In terms of pricing and how we should be thinking about gross margins going forward. Obviously, pipe prices are up. Tariffs are coming. Talk about how you are passing all that through. Should we see an increase in gross margin percentage? Is it more likely to just be gross profit dollars? How should we think about that?

Well, I agree with the sentiment in your question, Matt. We're in a sweet spot for price expansion right now, but many of the market participants don't appreciate that yet. We're seeing a lot of -- kind of racing to the bottom on price. We're in a situation where we have supply shortages, the strong U.S. demand and customers are willing to pay a little more, and we're not seeing the kind of pop we expected to see yet. It doesn't mean that it's not going to happen. I mean, the conditions are right, is my point. Like we said on the call -- like the last call, I still think we could see gross margin progression during the year, but it'll -- it could ratchet up and down, but the sentiment's right for an increase.

Okay. And then last thing from me, just on the cost front. And Dave, you gave us a number here on the total, in kind of the low to mid-140s on a go-forward basis. Does that change at all based on where you are in the revenue growth range? And then on the revenue growth range, low double-digit seems pretty low based on where we started the year. It sounds like maybe, Robert, you're pointing us to more mid-teens based on the comment you made in your prepared remarks. I just want to make sure we heard that correctly. So just revenue growth and then how we might translate that to the cost line if it ends up being a little better?

Yes. What I think we did is, I think, we expanded the possibility on the topside. We remain very encouraged by 2018. But if you think about it, Canada -- I see Canada in somewhat of a contraction period right now. And then there's governmental issues and there is kind of a pause there. That's a big part of our business. International is still kind of hibernating. But we talked about WSA in the $140 million range or in the low to mid-140s, that will vary based on revenues. But we still are on a -- a march to manage costs very aggressively. So we want that number to stay low, but that -- we expect it to stay with that range. But if revenues really take off, that number would grow a little bit more than we expect.

Our following question comes from David Manthey from Baird.

First off to follow on the last question. In the past, you've noted 15% to 20% contribution margins in a rapidly growing market and more like 10% to 15% in a normal environment. Would you consider low double digits to high teens, is that rapid growth or normal growth for you?

It's a great question.

You just got a smile on Dave's face, Dave. I think it's somewhere in between -- I mean, I think this is -- frankly, I think this is strong growth. And I think, like I said earlier, I think the situation is ripe for forward price progression. That's just not happening yet. And that's the variable that keeps us either within the 10% to 15% range or piercing above that into the 15% to 20% range. But if we're able to push price and in the market -- and that kind of happens in the market, then we'll go beyond that 10% to 15% range. But right now, we're comfortable in that 10% to 15% guidance range.

Okay. And then second on the M&A front. I understand the pause while the market was in disarray lately, but do we expect to see an uptick in acquisitions in the near future as the market stabilizes for you?

Yes. Our pipeline of deals that we're looking at has not shrunk any. Really, what we're paying closest attention to was where the market was headed, so that we had ample liquidity to fund working capital. Because I would hate to have gone out and bought a $300 million, $400 million company and found myself not being able to fund free organic growth. So we're getting more and more comfortable with where we kind of think the market's headed, which gives us our cushion of cash availability within our -- the leverage ratio we've always said we're comfortable being within. So yes, we're getting a little more comfortable with it.

Our following question comes from Walter Liptak from Seaport Global.

I wanted to ask about the comment that you made about how the second quarter is trending. You said sequentially flat. I just wanted to clarify when you say that your -- we had a run rate of $764 million this quarter. So you're saying second quarter should be sequentially flat, not year-over-year.

Yes. That would be sequentially flat, just simply because, last year -- there's a lot of headwinds we have right now in this 2Q that are unique this year versus last. And last year's growth, after we produced 17% incrementals in 1Q '17, was only 3%. So I think it's just going to be harder to even get growth with all the things that are going on in Canada and international and the completions lag coming from the issues that came from hiccups with railcars and weather in 1Q for the frac companies. I think all those things combined make the quarter feel flattish, sequentially.

Okay. How much of a drag were some of those issues on the first quarter? Like weather and railcars?

None. Because our biggest part of our business isn't the actual frac process. With Halliburton or Baker or somebody who is out there fracking a well, I mean, we sell a little bit of kit, but I mean, it's hard hats here and safety glass and tools or something. What happens for us is, the real revenue comes when they leave location and it's time to build the tank battery. And so we were building tank batteries in 1Q related to 3Q and 4Q frac jobs. Well, the slowdown in frac jobs in 1Q would have turned into tank batteries in 2Q and 3Q, so we're likely going to see a little bit of a lull there that's related to the weather issues and the frac job.

Okay. Got it. Okay, good. And Dave, I wonder if we could go back to your comments on price and maybe drill into it a little bit more. I think in the past you've said that online pipe you are able to get price because that's kind of a normal pass-through. I wonder if we could think about the product categories, valves and other components and where price is the most difficult and where you're getting price?

Well, I think, we -- the opportunity is for us to grow price across the board. Almost all of our products contain some element of steel, but we're also in an inflationary environment. We're in a market that's growing. Kind of the soup is -- is supports growth in price. It's just on a lot of large orders, companies are very aggressive trying to win at all possible cost, and they're racing to the bottom, just kind of the sense I get from seeing some of the big orders that we win or lose come to the table. So naturally prices should expand. I think it's going to take -- it's taken a little bit of time for that to happen. And we're not seeing it yet, and we're a little nervous about what's the delay, but the environment is rich for improvements.

Okay. Okay. Good. And I can follow-up off-line, but I wondered about the marketing -- market and you had the DUCs analysis in the U.S. and I wonder, are you seeing any broadening yet in some of the branches that maybe are less productive? And what do you do on that cost with less productive branches?

Well, I mean, whenever the downturn began in late '14 early '15, we remained steadfast about not sacrificing our future and staying in our core markets to support growth and the recovery of share. This has been an odd recovery. I have been in this business since the early '80s, and I have never seen one like this where it's very spotty. It's in the shale plays, right? Generally, it affects across the board, the energy spaces; and this time, it's not. It's coming back in the Bakken, in the DJ, in the Eagle Ford, in the Midland, in the Delaware, the Utica and the rest. And so lots of other areas that generally enjoy the recovery aren't enjoying a recovery. And so we're really focused to -- our goal is to cut expenses in those areas that aren't recovering enough to match all the expenses we're adding in the busy shale plays.

Our next question comes from Chuck Minervino from Susquehanna.

You kind of just addressed one of my questions there, and it was along the lines of -- I know there's a heavy concentration of activity and work in the Permian. I was curious if you guys are starting to see any pick up in activity outside of that region that would kind of suggest maybe more activity coming throughout the course of the year in some of those other basins?

Yes, there's no doubt. I mean, it just happens to be the Permian is drilling so fast, it makes everything else look like it's not growing fast. But in reality, the other areas are growing nicely. I mean, the Niobrara, DJ Basin is busy. The SCOOP/STACK area is busy. The Eagle Ford, we're starting to get a lot of orders both in process solutions and from our branches for the Eagle Ford area. So we're feeling it everywhere. It's just when you have something growing as fast as the Permian, it makes everything else look small.

And if I recall correctly, in the U.S. process solutions business, part of the rationale for the Power Services acquisition and Odessa Pumps, and correct me if I'm wrong, was that those businesses would also bring like a higher-margin element to the company once the revenues kind of pick back up again? And it sounds like the bookings are there on both sides. Maybe can you speak a little bit to that process solutions segment? Some context where we are on the backlog there or something? Because it sounds like there's some real growth coming in the second half of the year. And then also maybe speak to kind of how that business stacks up from a margin perspective versus the other U.S. businesses?

Yes. So they are probably -- this is just out of my -- off the top of my head. They are probably halfway back to their combined 2014 levels and growing nicely. And their EBITDA margins usually run high single digit, low double digit. So that will definitely help pull through better margins in the business as a whole.

Got it. And do they need to get -- are those also scale beneficiaries? Or does that -- do the incremental revenues in that business kind of see higher than that 10% to 15% overall kind of company incremental revenues?

Yes. They definitely have higher incremental flow-through to EBITDA than the rest of our business. And that's simply because their infrastructure is sized appropriately to take on these new orders without a whole lot of added expense. So -- and then the negative to that is, is when the market goes down, it's kind of hard to get rid of that expense. So yes, we should see nice incremental flow-throughs from that business for the foreseeable future.

Got it. And just one more for me. It was a few quarters ago where you guys had some issues with welders and labor and -- kind of to try to capture that early phase of the cycle. It sounds like that stuff is largely behind you even with this growth kind of coming. Do you have any of those kind of labor issues that are still kind of overhang now?

Well, we really have labor challenges anywhere we're busy. The specific thing about the process solutions group, around the quarter -- conversation you're talking about, was really highly skilled individuals that were really -- that were difficult to find, mainly project managers who could manage very complex projects across many facilities and ASME code welders. So there's a difference between a welder and an ASME code welder. You have to have a special certificate and all this other stuff that we had a hard time finding. We've largely solved those 2 problems, but we are having labor challenges just like everybody else in the industry is, right? I'm just getting other staff to help us push product out the door.

Our next question comes from Adam Farley from Stifel.

You've talked a little bit about the tariffs and potential tariffs on both the business and customer demand. I'm focusing more on the demand side. How are you thinking about potential demand destruction created by these tariffs?

Well, it's definitely going to create inflation because now the preponderance -- or not the preponderance but a much larger share of our purchases will shift to U.S. manufacturers. So where in the past, we might have been 50-50. That's -- that ratio is going to change. And so that's going to create inflation, which could affect customers' reaction. But at the current oil prices, we're well above breakevens. And I don't think a tariff on pipe is going to make an operator change their mind about their drilling activity.

Okay. That's helpful. And then just shifting gears here. You talked about international still kind of hibernating and upstream, offshore is still pretty weak. What do you think would be needed to kind of get that moving? And kind of what you are seeing there? A little more color would be helpful.

Well, up until this call, I hadn't seen any indicator of an offshore recovery. So I was in the world of this is 2020 or beyond. But as of late, if you listen to any of the drillers that reported -- offshore drillers that reported last week, they are starting to see an nice uptick in tenders. There has been some FIDs announced. So all of this is the precursor to an offshore recovery for us. But we are definitely a laggard because it takes a long time for an operator to approve an FID, and then do their survey and then build their infrastructure, and then hire a drill ship and start drilling a well and then the drillship orders material from us. So I don't expect any kind of benefit to us this year in the offshore space. I think we'll still grow because we're doing some really cool stuff on land in many, many areas, that are going to help us grow incrementally internationally, but I wouldn't expect any offshore uptick for us this year.

Ladies and gentlemen, we have reached the end of our time for the question-and-answer session. I will now turn the call over to Robert Workman, CEO and President, for closing statements.

Thanks, everyone, for participating in our call, and we look forward to talking to you about the 2Q results in about the next 90 days. Thanks.

Thank you.

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